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Japan’s Monetary Aggression Underwhelms

Currencies | Jan 24 2013

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– Account surplus, not QE driving yen weakness
– USD/JPY to push higher after brief consolidation period
– Enter long USD/JPY positions at around 87.80 for 100 by year end


By Andrew Nelson

Analysts from the Commonwealth Bank report that the USD/JPY has eased some 1.2% since the Bank of Japan (BoJ) announced its move to a 2.0% inflation target, while otherwise delaying an increase in open ended asset purchases until 2014.

CBA points out that the move has ended up disappointing a market that was long USD/JPY in anticipation of a far more aggressive move replete with some serious near term quantitative easing. However, the broker thinks many in the market are missing the point, noting that JPY is weakening not because of the BoJ’s quantitative easing policy (or lack thereof), but because Japan now has a structurally smaller current account surplus.

Remember, says CBA, Japan’s monetary policy has pretty much been on and off for more than ten years now and since the BoJ recommenced its quantitative easing programme back in October 2010, it has only completed 66% of targeted asset purchases. Not what you’d call concerted, or effective, really.

This has CBA wondering why people would be so concerned about the pushing out of more aggressive quantitative easing until January 2014, when the fact of the matter is the BoJ isn’t even keeping up with the currently much milder asset purchase programme already in place.

Yet even though asset purchases have been modest and well short of expectations, the JPY has weakened 13.5% against the USD since mid November. This is what convinces CBA that the JPY is weakening because of Japan’s smaller current account surplus, rather than it having to do with the BoJ’s past or current quantitative easing policy.

In fact, points out the bank, the large lift in USD/JPY pretty much started straight after Japan posted its first monthly current account deficit in some thirty years.

Given the drivers behind the smaller current account surplus haven’t changed, the bank expects the USD/JPY to continue to push higher after a brief period of consolidation. Thus, current disappointment in the BoJ’s announcement is providing a perfect catalyst for a period of USD/JPY consolidation. In short, it’s a good time to build some additional long USD/JPY positions, says CBA. 

On the bank’s calculations, any dip in the USD/JPY will be shallow, so CBA advises to enter long USD/JPY positions at around 87.80, with the smaller Japanese current account surplus to drive the USD/JPY to 100.00 by year end. 
 

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