Currencies | Mar 26 2012
– Japanese export recovery underway, says ANZ Bank
– Should prove supportive for the yen
– ANZ suggests recent yen/US Dollar weakness should reverse
By Chris Shaw
The Japanese yen has been weak relative to the US dollar over the past couple of months but with a recovery in Japanese exports apparently underway, ANZ Banking Group suggests this weakness may reverse.
The bank's global head of FX strategy, Richard Yetsenga, suggests part of the recent strength in the greenback relative to the yen reflects the US economic recovery and rising US bond yields. But the movement in the currency pair has been disproportionate relative to these factors given little to suggest US yields will race higher.
Yetsenga suggests apart from US interest rates there have been two other factors impacting on the yen. The first is the speculative community has been looking to sell the Japanese currency since the Bank of Japan (BoJ) announced the adoption of an inflation target in mid-February.
While an inflation target has been set, Yetsenga takes the view the BoJ will have a difficult time in achieving this target without some radical changes in policy. A security purchase program is unlikely to be enough, Yetsenga noting this would only lift the BoJ's balance sheet by 7% and so is not expected to be sufficient to overcome what are currently substantial macro forces.
The second factor pressuring the yen has been a weak Japanese external sector since March of last year. Prior to February's trade data, Yetsenga notes exports were down 9.3% in year-on-year terms, while imports had risen by 9.9% on the same basis. This trend generated a record trade deficit for Japan.
This weak trade performance over the past year has been impacted by temporary factors according to Yetsenga. Exports have suffered from supply chain disruptions caused by the tsunami, while energy imports have risen on the back of shut-downs to most of Japan's nuclear reactors.
But the latest trade data suggest a recovery in exports is now occurring, as February exports were down just 2.7% in year-on-year terms compared to the 9.3% decline in January. A recovery in exports is consistent with BoJ expectations.
Assuming Japan returns to running a trade surplus, the question in Yetsenga's view is who will be the marginal seller of yen to drive further weakness in the currency. Global investors don't have large yen positions to sell, while expected low yields in the US means Japanese savers looking to invest offshore are likely to focus on smaller markets.
This suggests to Yetsenga while medium-term the yen could remain weak against currencies such as the Australian dollar, against the US dollar the market has likely seen the peak with respect to yen weakness.
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