Three thoughts on the recent strength in Japanese yen:

  • The yen surged to a fresh 17-month high of ¥106.67 per US dollar on 8 April.
  • Yen could possibly remain on an appreciation trend before the G7 Summit in May 2016.
  • Prime Minister Abe could implement fiscal stimulus to boost Japan’s economy.

Six-month chart of Japanese Yen (USDJPY)

six mth chart of Jap Yen

Source: Bloomberg

  1. Quantitative strengthening of yen speaks volume

The yen reached a fresh 17-month high of ¥106.67 per US dollar on 8 April. This flies against conventional wisdom as the Bank of Japan has implemented Negative Interest Rate Policy (NIRP), imposing a -0.1% a portion of excess reserves. The yen should be weakening instead of strengthening. Even Yoshihide Suga, the chief cabinet secretary (the second most powerful minister after Prime Minster Shinzo Abe), has openly shared concerns about the impact of the recent volatile moves in the Japanese yen with comments that the government would be “watching the foreign exchange markets with a sense of tension”.

It appears that the massive Quantitative Easing (QE) programme and NIRP is losing its impact on the Japanese economy. The market is engaged in quantitative strengthening of the Japanese yen instead of easing. This speaks volume and it could be signaling that Japan does not need more monetary stimulus. Thus, the policymakers could do well to listen to the market and instead focus on fiscal stimulus to drive economic growth.

2. Appreciation trend for yen to remain before G7 Summit

Another reason for the strength of Japanese yen could come from recent remarks by Japanese Prime Minister Abe where he stated that countries should avoid competitively devaluing their currencies. In addition, Japan is chairing the G7 Summit meeting this May 2016. Prime Minister Abe has intention to demonstrate the importance of leadership by leading the G7 countries in implementing fiscal stimulus to boost the global economy. Thus, if Japan intervene in the currency markets to stop yen’s rise, it will impinge on Abe’s credibility in the G7 Summit. Thus, the yen could possibly remain on the appreciation trend as we head towards the G7 Summit.

3. Fiscal stimulus for Japan

It is reported in Nikkei that Abe plans to put together a fiscal stimulus package of more than ¥ 5 trillion to boost Japan’s economy. A large FY16 supplementary budget is expected to be presented to Diet in the latter half of FY16 and it will consider measures to stimulate private-sector consumption and increase expenditure on public works. Furthermore, there is a likelihood that Prime Minister Abe will postpone the April 2017 consumption tax hike and make an official announcement in May.

Such fiscal stimulus will be positive for Japan in the light of weak economic growth in Japan. The Japanese economy is expected to register its second straight quarter of negative growth in the Jan–Mar 2016 period. Industrial production has slumped 6.2% month-on-month, its biggest contraction since the 2011 tsunami.

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