© Sonja Marten
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Obviously, we have seen a slight change over the last couple of days. We have seen the Yen trading a little bit stronger against the Dollar and the Euro. I think that has got nothing to do with the BOJ yet, because that is more to do with some profit taking. The market is extremely short on Yen. We had a really good run with USD/JPY and Yen-crosses have been rising steadily since October. As far as the BOJ meeting is concerned, since there is so much speculation about the potential for additional easing- introduction of a 2% inflation target etc., there is a good chance as we get nearer to the meeting that the Yen is going to start weakening again.
Do you expect that policymakers will decide to raise inflation rate target from 1% to 2%?
I am not sure whether they are going to do that already at this meeting. It is important to realize or at least not to forget that having a 2% inflation target sounds great, but when a country cannot reach 1% having a 2% target seems a little bit conceitedly. I thought that having 1% target is pretty ambitious. I am not sure they are ready to do that, because Masaaki Shirakawa is not a huge fan of more aggressive expansionary policy, though he has been pursuing a loose monetary policy. However, within the BOJ he is one of those who are concerned about the strategy that Shinzo Abe would like him to implement, and which is much more aggressive than what they have right now. Since Masaaki Shirakawa is going to be replaced in April, he is going to hold out and not go that way.
What do you think about the decision of Japan's Finance Minister to buy bonds issued by the European Stability Mechanism (ESM)? Do you think this will help to weaken the Yen?
No, it is not going to weaken the Yen, because the officials said that they will buy the bonds using their existing reserves. Those reserves are not held in the Yen obviously, they are held in Dollars, Euros, etc. If they use Euros to buy euro-denominated bonds, there is no currency effect whatsoever. If they use Dollar reserves to buy the bonds, they have to sell the Dollars and buy the Euros, and all that happens is that EUR/USD rises, but the Yen is not affected. The only way that the officials could weaken the Yen would be to intervene, and thus create new reserves; and in this case they would sell the Yen for Euros to buy the bonds. On the contrary, doing it from the reserves, which are already there, does not have an impact on the Yen. It might have an impact only on EUR/USD.
What is you forecast for EUR/JPY and USD/JPY for the end of this month and for the end of the first quarter?
Our one-month forecast for USD/JPY is 86 and EUR/JPY 1.12. Looking ahead we are going see a weaker Yen, with USD/JPY moving more towards the low 90s, and EUR/JPY approaching 1.18.
What trend do you see in those pairs throughout this year?
Definitely, both currency pairs will move higher. I think within G10 currencies space, the Yen is going to be one of the weakest currencies. It had a fantastic year 2011, because it was considered an attractive safe haven; nevertheless, since the middle 2012 the trend changed. This is due to the fact that sentiment improved globally, and that resulted in a decline in demand for safe haven, and thus the Yen was a little bit weaker. Then towards the end of last year the change came more from Japan itself, because people started to realize how fragile the economy is, how severe the downturn is going to be. I think the election was not a negative factor as it was pretty clear what was going to happen. However, the resulting prospects for potentially much more aggressive monetary policy is also going to add pressure on the Yen. Possibly the BOJ will end up succeeding adding assets, but that is a long term prospect. For now we have a lot of factors that are going to weigh on the currency. I think both USD/JPY and EUR/JPY are going to be trending higher. The degree, to which they will do this, obviously depends on EUR/USD. I think we have EUR/JPY 1.20 by the end of year, and USD/JPY at 90.