Home Abenomics showing early success – Where next for USD/JPY

Abenomics showing early success – Where next for USD/JPY

The Japanese economy enjoyed firm growth in the first quarter of 2013: 0.9%. This is the first full quarter under the government of Shinzo Abe, and just before the BOJ joined the party with the ambitious QE program presented in April.  

Will Japan take a break after this early success and refrain from pushing forward too strongly and try to strengthen the yen? Or does this success raise the appetite for more, thus pushing the yen even lower?

The early success is clear: the government announced a stimulus plan when it came into office in late December, and Q1 already shows results. During this period, the yen began weakening quite significantly.

A 0.9%  growth rate is good in absolute terms, and it also exceeded expectations of a 0.7% growth rate. In addition, the figure for Q4 was revised to the upside: from a contraction of 0.1% to 0%. The year over year growth rate  is 3.5%, which is certainly good news.

USD/JPY had a limited reaction to the news, and stayed within the high range. Where will it go in the longer run? Where is the yen headed?

On one hand, with such a strong growth rate, perhaps the Japanese government and the BOJ would like to taper down the monetary and economic stimulus, in order to secure a more steady and sustainable path of growth.

However, there are two reasons why the government in Tokyo would prefer to push forward:

  1. Fighting deflation: Prices in Japan are still falling. while real GDP growth stood on 0.9%, nominal GDP rose by only 0.4%, weaker than 0.5% that was expected. This means that prices fell more than expected. The GDP deflator plunged by 1.2%. Japan wants to reach positive inflation of 2% within 2 years. Until Japan sees some signs of inflation, or at least lower deflation, no one is going to rest.
  2. Elections: Shinzo Abe’s LDP party controls the lower house of parliament, but doesn’t control the upper house. In order to make big changes, such as changes  in the Japanese constitution, the LDP and its partners would need a landslide victory in the elections for the upper house in order to pass such changes. In order to win, Abe would need the economy to push forward at full steam.

So, after the early success, my conclusion is that the Japanese authorities will want to push forward, in order to see more growth and lower deflation. A weaker yen would certainly help growth via exports, and would help in fighting deflation by pushing import prices higher.

So, the long term direction of USD/JPY seems up. Needless to say, forex is never a one way street, but the general direction seems clear. What do you think?

For more, see the USD/JPY forecast.

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.