Year 2014 - Will The Consumption Tax Hike Repeat History For The Japanese Yen?

Includes: FXY, JYN, UDN, UUP, YCL, YCS
by: Forex Abode

USD/JPY had remained under pressure of the psychological barrier of 105.00, for a long time, after touching 103.73 during May 2013. The price action was contained in a triangular pattern for 6 months before the pair ultimately broke out of that pattern recently. The long awaited hit took place last week when the pair broke over 105.00 key level first time after October 2008 i.e. in more than past 5 years. In doing so the pair has completed the 61.8% reversal of the great fall of past 10 years i.e. from 123.67 to 75.36.

USD/JPY's Price Action During Past 10 Years

The 61.8% retracement of the above mentioned fall is at 105.21. USD/JPY is just below that level after touching 105.41 during the week of December 30, 2013.

Japan Economy - Local Issues

Global economy has been in a depression since Lehman Brothers collapse and the shock it brought. Japan has been has been having it's own local issues apart from the overall global economic depression.

Earthquake and Tsunami of 2011

The Tohoku area earthquake and the devastating Tsunami which hit Japan on March 11, 2011 added to the bearish pressures. According to the estimates of the World Bank the natural disaster was the costliest natural disaster in the history of the world with an estimated economic cost of US$ 235 billion. The bearish sentiments and the economic pressures continued with over 1,000 aftershocks since then. The largest of these aftershocks was of 7.9 magnitude on the Richter scale and 80 of those over 6.0 magnitude. The issues due to Fukushima Daiichi Nuclear power plant melt down and the radiation concerns kept on adding the bearish pressure on the economy.

Tensions with China and South Korea

The territorial disputes with China and South Korea over the claims for the ownership of the Senkaku and Takeshima islands respectively have been putting added pressures on the economy. The recent visit of Prime Minister Abe to the controversial Yasukuni shrine which honors the World War-2 dead, out of which many are convicted war criminals, have again fueled these tensions. Last week's visit of Prime-Minister Abe was the first visit to Yasukuni shrine by a Japanese PM since the year 2006.

Planned increase in the consumption tax

The consumption tax or the sales tax in Japan was last raised in the year 1997 from 3% to 5%. On April 1st, 2014 another increase has been planned from current 5% to 8%. There are thoughts to increase it further to 10%, depending on the economic conditions during October 2015.

Let's check what happened during the previous consumption tax hike.

USD/JPY price-action just before and after the last consumption tax hike

The previous tax hike, 16 years back, had also come in a planned manner. As the above chart indicates the yen kept on weakening before the hike was implemented on April 1, 1997. The weakness continued for the next one month i.e. till April end. A consolidation then took place but the recovery, after that, continued for next 16 months and took USD/JPY to the high of 144.77 during August 1998.

What to expect in the year 2014?

The bearish sentiments for the Japanese yen are evident. The break over the 105.00 key level has broken one more psychological barrier. The year 2014 is expected to see further weakness in the yen and hence further strength in USD/JPY and also other major JPY crosses.

As reported by "Forex Abode", the weakened yen will help exports but an increase in the consumption tax will affect the domestic consumption with the prices of everything going higher. Any drop in the domestic sales and the consumer sentiments will go against the yen further. We would expect USD/JPY to take out the barrier of 110.00 during 2014. We cannot even rule out the possibilities of a move to 112.25/112.40 as a move to 112.26 will complete Fibonacci retracement of 74.6% for the currency pair.

Connect the author on Google at +Himanshu Jain.

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