Japanese Yen at Risk for More Losses Ahead of BoJ- Remains Oversold
Fundamental Forecast for Japanese Yen: Bearish
- USD/JPY Nears Major Upside Target
- Japanese Yen Volatility Favors Breakout Trading
- Japanese Yen Rallies Should be Sold
The Japanese Yen continued to weaken against its major counterparts as Prime Minister Shinzo Abe floated the idea of changing the law that governs the Bank of Japan, and the low-yielding currency remains poised to face additional headwinds over the near to medium-term as the new administration takes a more aggressive approach in influencing monetary policy. Indeed, Mr. Abe is pushing for greater reform at the BoJ as the board adopts a 2% target for inflation, and it seems as though the central bank will struggle to retain its independence as the government pledges to tackle deflation.
Although the BoJ announced it would wait till 2014 to implement open-ended asset purchases, Deputy Governor Hirohide Yamaguchi, who’s set to leave the central bank in March, argued that ‘it could be the case that further accommodation will be pursued,’ and we may see the central bank expand its balance sheet further in the coming months amid the ongoing slack in the real economy. As Governor Masaaki Shirakawa’s term expires in April, there’s growing speculation that the prime minister will seat a candidate who would share similar views on policy, and we may see the central bank struggle to preserve its independence as the government aims to have a larger sway on monetary policy. In contrast, Japanese Finance Minister Taro Aso and Economy Minister Akira Amari saw limited scope to change the decree that the BoJ operates under as three members are scheduled to depart from the board this year, and we may see the government appoint ultra-doves in the coming months in an effort to quickly achieve the 2% target for inflation. Nevertheless, as the economic docket for the following week is expected to show the trade deficit narrowing in December, a marked improvement in the metric may limit the bearish sentiment surrounding the Japanese Yen, and we may see a short-term correction ahead of the next BoJ interest rate decision on February 14 as the central bank moves to the sidelines.
Although the relative strength index on the USDJPY continues to highlight an overbought signal, speculation for more easing may produce further weakness in the Yen, and we will need to see the oscillator push below the 60 figure for a more meaning correction as it holds up as interim support. Until then, we will look for further advances in the dollar-yen, and the pair remains poised to retrace the decline from back in 2010 amid the deviation in the policy outlook. - DS