JPY: A Deja Vu Of 2016? - BTMU
2016 was very much a story of market participants losing faith in ‘Abenomics’ throughout most of the year before a resurgence in reflation hope fuelled by the surprise victory for Donald Trump in the US presidential election in November. Part of the loss of belief in ‘Abenomics’ is linked to the belief that the BoJ’s ability to impact the yen through its monetary stance has faded with little scope for easing monetary policy further.
We suspect that belief will come to the fore this year once again, limiting the scope for the yen to weaken further from here. USD/JPY may advance modestly further driven more by the US dollar, but the yen on a trade-weighted basis is likely to gradually strengthen this year.
Firstly, we are dubious about the BoJ sustaining its zero percent target for 10-year JGBs for long. The primary reason for shifting strategy to Yield Curve Control was to allow for a slowing of JGB buying as the policy was becoming unsustainable. If global long-term yields rise further from here, the BoJ may have to adjust its target upwards (although not the official view as of now), which will serve to highlight the fact that the BoJ’s ability to control long-term yields is limited over time.
Secondly, as we have stated many times before, the nominal yield differential influence on USD/JPY is far less consistent than the real yield differential. Real yields have moved in favour of the dollar mainly due to the scale of the move in US nominal yields. But from here real yields could begin to influence again and it is notable that 5yr/5yr inflation swap rates have moved much more modestly in Japan than elsewhere highlighting the scepticism over inflation in Japan moving higher.
Finally, the return in Japan of large current account surpluses and the cheapness of the yen on a long-term valuation perspective all argue for limited further upside for USD/JPY and renewed yen strength on a trade-weighted basis.