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Japanese Yen: G20 and GDP May Temporarily Hold Abe’s Ambitions

Japanese Yen: G20 and GDP May Temporarily Hold Abe’s Ambitions

Renee Mu, Currency Analyst
Japanese_Yen_G20_and_GDP_May_Temporarily_Hold_Abes_Ambitions_body_Picture_1.png, Japanese Yen: G20 and GDP May Temporarily Hold Abe’s Ambitions

Japanese Yen: G20 and GDP May Temporarily Hold Abe’s Ambitions

Fundamental Forecast for Japanese Yen: Bearish

The Japanese Yen retraced to 92.74 against its US counterparty on Friday’s close - lower than last Friday’s close - as Japanese Finance Minister Taro Aso said the pace of the Yen’s slide may have been too rapid. These comments – inconsistent to the theme Japanese officials have maintained - likely comes in recognition of the upcoming G20 meeting scheduled on February 15 to 16 in the coming week. The concerted effort of weakening the Yen has spurred serious criticism abroad. Such effort to manipulate the currency to boost the country’s own economy is believed by many to be an explicit shot fired in a more explicit currency war. Perhaps this is a means for the Japanese government to win some points with foreign finance ministers and central bank governors. Regardless, the USDJPY pair’s unfavorable close brings to a close a record breaking 12-week rally. A first step to a bigger turn?.

Traders should recognize that Aso’s comments are likely to be only short-term moverswhich do not provide any structural fundamental change. Japan’s Prime Minister Shinzo Abe is determined to apply an aggressive monetary easing policy to stimulus domestic economy. Furthermore, the accelerated retirement of BoJ Governor Shirawaka - announced this past week - is a clear indication that boosting competitiveness by driving down the Yen is an irreversible objective. Abe’s choice of new BOJ chief, no matter who he is, will likely put a more dovish policy in place through both an accelerated adoption and escalated scale future stimulus efforts.

Bold promises and actions by the Japanese government do, however, have positive impact on the country’s economy. Investors confidence in exports has swelled and anticipation of a nearer end to two decades of deflation is gaining traction. In order to keep the current optimism on Japan’s market, Abe has to carry out further monetary or fiscal policies to strengthen economy via an unpopular objective of weakening the Yen. If the BoJ would actually move up its introduction of its 13 trillion yen per month stimulus effort from January 2014 to sometime this year, the Japanese currency may very well revive its plunge and break to new two year lows.

Another factor to account for is risk appetite trends. US equity indexes have maintained their drive and broken to levels not seen since the financial crisis. Given the implications to general risk sentiment, if the stock market started to make a serious move lower, all the Yen crosses would very likely drop on carry unwind and profit-taking. AUDJPY and those pairings with the greatest yield differential would likely suffer the most; but given the distance the yen has moved, all yen crosses would undoubtedly suffer in such a scenario.

Looking into next week, besides the G-20 meeting, the Japanese 4Q Gross Domestic Product (GDP) report may prove another top driver to the Yen’s gain through the short-term if the readings come in as or better-than-expected. The medium forecast of economists surveyed by Bloomberg News calls for a rise of 0.1 percent in fourth quarter following a drop of 0.9 percent in last period. Traders may enter long the USDJPY pair after it retraces to a reasonable level such as 90 as in the longer period the Yen still have depreciation pressure from Japanese government. -RM

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