Yen Weakens, could be some BIG moves!

Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ notes that Yen has weakened in the Asian session following further verbal rhetoric from the Japanese government designed to influence investor expectations over their desired scale of Yen weakness ahead. 

Deputy Economy Minster Nishimura stated that the “current USD/JPY level of around 90.00 can be said to be a correction of the strong yen, but it isn’t over yet”. He also went on to echo the view held by Koichi Hamada, a key economic advisor to Prime Minster Abe, by suggesting that USD/JPY at around 100.0 “wouldn’t be a problem” although levels beyond towards 110.0 to 120.0 would be a problem through raising import costs.

Hardman feels that these comments reinforce investor expectations that the Japanese government would like to see USD/JPY extend its recent leg higher until it is modestly above its long run fair value level. He adds, “Nishimura also hit back at recent criticism over Japan’s economic policies from European officials stating that “Europe is in no position to criticise Japan…having brought about a prolonged weakness of the euro as a result of their own policies, while Japan has supported Europe through purchases of bonds.””

Hardman notes that the release of the Japanese trade report for December also highlighted the fundamental rationale for the weakening Yen beyond BoJ monetary easing. 

Hardman writes, “The report revealed that the seasonally adjusted trade deficit continued to narrow modestly to JPY800.7 billion in December from JPY852.1 billion in November. While imports remain high due to the increase in energy imports, exports are displaying signs of stabilizing with export volume to Asia and the US rising for the first time in three and four months respectively. The cumulative seasonally adjusted trade deficit for 2012 totalled JPY6.87 trillion up from JPY2.77 trillion in 2011 which followed a trade surplus of JPY6.73 trillion in 2010 highlighting the scale of deterioration which has occurred in Japan’s external position.”

He feels that a continued rebound in pick up in external demand would help to improve Japan´s trade balance, and writes, “The IMF updated projections highlighted that it foresees only a gradual pick up in global growth in 2013, although it is more optimistic over the outlook for 2014. An IMF official also stated that it is “clear that financial markets are ahead of the real economy, but not clear if this optimism is creating a bubble.””