Massively Important Week for Yen as BoJ Meets with Kuroda at Helm
Fundamental Forecast for Japanese Yen: Neutral
The Japanese Yen was a top performer this week, surging by over +1.60% against the Euro, while adding a mere +0.30% against the US Dollar. The flight to safety was certainly a theme this past week, as poor handling of the Euro-zone crisis by policy officials resulting from the controversial Cypriot bailout kept tensions over the Euro-zone sovereign debt crisis at a relatively high level. The official at fault for stoking rising volatility in Europe – not just for the Euro, but for the other European currencies, Italian and Spanish bonds, and equity indexes across the continent – Eurogroup President Jeroen Dijsselbloem may have strong intentions and long-term positive intentions with his rhetoric, but the near-term implications of using Cyprus as a “template” for the region’s financial crisis has soured investors’ appetite for risk.
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While the Yen has benefited from the renewed drive to safety, there are certainly domestic concerns that are persisting that are preventing a true turnaround in the worst performing currency of 2013. In contrast to the Euro-zone debt crisis rearrising, which is a bullish accelerant for the Yen, the Bank of Japan under the watchful eyes of Haruhiko Kuroda convenses this week, which is the single most bearish catalyst facing the Yen at present time. The balance of these two issues leads us to a neutral outlook for the week ahead.
Ahead of the meeting during the first week of April, traders have clearly tempered their enthusiasm about selling the Yen in droves, as they had been from mid-November to early-March: from November 14, the day that the Japanese elections in December were announced and it became clear that Shinzo Abe would become prime minister, to March 11, the day the USDJPY peaked, the Yen shed -22.90% against the Euro, and -19.98% against the US Dollar; since March 11, the EURJPY has fallen by -3.83% and the USDJPY has dropped by -2.14%. Making the Yen’s rebound even more curious – withstanding the much-needed technical relief – was that Mr. Kuroda took the reigns of the BoJ from Masaaki Shirakawa on March 19. The Yen has gained against all of the majors but for the New Zealand Dollar since the arch-dove himself rose to power.
While there is no doubt that Mr. Kuroda will step up the BoJ’s dovish rhetoric and policy actions in the coming months, there is a slight impediment persisting from now until April 8 that has prevented any new policy action thus far: the technicality of Masaaki Shirakawa resigning early on March 19 (Kuroda needs to finish Shirakawa's term). Hence, when considering Kuroda's likelihood path of easing, he's going to implement policies that aren't too controversial, as he does need to be reelected after April 8. If he sets forth policies that are too dovish, he and his deputy governors could lose favor quickly among the main opposition DPJ, especially Kikuo Iwata, who was nearly voted down.
Nevertheless, earlier this week, Governor Kuroda made clear that two things will happen in his tenure: the BoJ will hit its inflation target of +2.0% y/y within two years; and resulting from the increased inflation target, increased asset purchases, likely including Japanse Government Bonds (JGBs). In this interim period before April 8, we should expect Kuroda's BoJ to first increase its monetary easing program. If increased asset purchases don't stoke medium-term inflation (they won't), Kuroda's BoJ will wait until after the next round of confirmations before accelerating the Shirakawa-mandated open easing timeline from January 2014 to midyear 2013. It is likely that any announcement this week could disappoint even the most earnest of Yen bears. As such, our forecast is neutral, as the BoJ policy meeting could present a bearish influence for the first half of the week, while exhaustion following the event and the return of the Euro-zone crisis could present a bullish influence. –CV
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