Daragh Maher, FX Strategist at HSBC, on the Japanese Yen

Note: This section contains information in English only.
Source: Dukascopy Bank SA
© Daragh Maher
What do you think about the recent Japanese Yen weakening below the 100Y barrier, and what were the main reasons behind this drop?
I believe there are a number of reasons. One of the main drivers for the recent Yen decline is the on-going easing by the Bank of Japan, and determination of the central bankers and the government to hit 2% inflation target in 2-year time means that the BOJ is now buying a lot of bonds and printing money. Apparently, from the market perspective that has been negative for the Yen. At the same time we have had some better-than-expected numbers out of the U.S., particularly on the labour market over the last week or two. That has provided some strength to the U.S. Dollar as the market wonders whether the Fed might halt or scale down its QE3 programme.

Do you believe that further weakness in the Yen might represent an overreaction in the market and cause some serious problems to the Japanese economy?
To my mind, for the Yen weakness could be viewed as an overreaction or an overshoot. We have already had a roughly 30% move in USD/JPY, which is far bigger than we saw in the Dollar during the first two rounds of quantitative easing in the U.S. This is a more massive move we have observed in Japan than we saw in the U.S., and it strikes me as rather excessive. I am not convinced that at this point it is damaging to the Japanese economy. It does, however, have negative repercussions on competitiveness of other economies outside Japan. Nevertheless, I do not consider that the potential side effects for Japan are particularly negative at the moment. I do not think that we have reached that point, but I do believe that the move we have seen in USD/JPY is an overshoot.

Do you expect the Yen to follow the ongoing trend, and where do you see the Japanese Yen a year from now?
In a very short term it is possible that momentum will push USD/JPY a little bit higher, but I think a year from now we will be back below 100Y on USD/JPY reflecting a fact that this is an overshoot, and perhaps the efforts to revive the Japanese economy are beginning to get successful and the economy is on the pace of a recovery.

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