Surprising Flip in JPY Strength Has Currency Traders Baffled
Abenomics is supposed to improve the state of the Japanese economy by weakening the currency to propel the Japanese export market. Now, there is widespread concern that central bank policy in Japan, and elsewhere, has failed to achieve the pre-stated objectives of economic stability and full employment. The Bank of Japan adopted a policy of negative interest rates in March 2016, to the bewilderment of the global community. Negative interest rates have not proven themselves to be a viable policy measure in any country around the world. In fact, in Japan, the implementation of negative rates has only assisted in strengthening the JPY, and weakening the Nikkei 225 index. And while the BoJ may prefer a hands-off approach to the currency market, there is no doubt that currency intervention will be required if the yen continues to strengthen unchecked.
Japanese Government Officials Fear a Strong Yen
Japan's Chief Cabinet Secretary as well as the BoJ Governor are cautiously watching the currency. It has been almost 5 years since intervention in currency markets, by way of yen sales. The Japanese prime minister, Shinzo Abe committed his country to the tenets of the G-20 meeting held two months ago. There it was discussed that member countries would consult with one another vis-à-vis currency devaluations. Fortunately, for those who are concerned about the strength of the Japanese currency, Japan will be unable to simply toggle the value of the yen without approval from countries like the United States. The reason for this is that Japan is part of the G-7. Presently, there is strong support for the JPY since Japanese corporations are repatriating earnings ahead of the new financial year. This has been bolstered by the poor performance of global markets and the collapse of crude oil. Various analysts are suggesting that that JPY could well be the best performing currency of all against the USD before the end of the year. The flipside of the coin is that several former high-ranking officials including members from the Japan Finance Ministry believe that a level lower than 100:1 would be required before the government intervened.
What Level Does Intervention Take Place At?
BAML (Bank of America Merrill Lynch) is of the opinion that the JPY could strengthen as much as 8 percentage points in 2016. Various other analysts have taken the view that a critical point will be reached when the USD/JPY pair reaches a level of 105. At that point, massive government intervention will be required. This will take the form of widespread sales of JPY from the forex reserves to weaken the currency relative to other currencies. On Thursday, April 7, 2016, the USD/JPY currency pair was trading at 107.92. This level marked the best performance of the currency since the bazooka economic stimulus was implemented on October 31, 2014. Regardless of all the banter at the highest levels, the yen's relentless advance remains unchecked. That the yen has spiked 12% since January is a remarkable achievement in terms of appreciation. In the event that the currency strengthened to 100:1 against the dollar, analysts expect a 50% likelihood of government intervention.
It should be remembered that the Japanese yen is widely regarded as Asia-Pacific's safe-haven currency. During the turmoil in China, when equity markets were collapsing, the Japanese yen was in high demand. Much the same is now true with central banks unable to ignite economic growth, despite massive quantitative stimulus policies. The JPY continues to gain ground against major currencies, and gain favor during times of geopolitical uncertainty in the Middle East vis-à-vis OPEC/non-OPEC agreements on crude oil prices, the upcoming Brexit referendum in the UK on June 23, and the likelihood of a Fed rate hike before June 2016. Combined, these factors are driving instability in global markets and causing currency traders to flock en masse to the JPY.
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