I think 80 is a comfortable level for USD/JPY at the moment. Fundamental changes are going to come later this June when the Japanese authorities are going to discuss the consumption tax hikes. The US has also got potential problems as the Bush tax cut is expiring and they are facing the presidential elections this autumn, as well as there are mounting policy tasks to maintain fiscal stimulus to the fragile economy. The both sides of the Pacific have got the problems and we will see how they unfold. However, the market pays most of the attention to the Greek problem at the moment, thus market participants do not pay much interest to these potential difficulties in both countries. Around 80 is close to equilibrium at the moment and I think it is a proper level to see the developments in either countries.
As for the EUR/JPY, the market seems to be determined to test 100 level. Everything will depend on the reelections in Greece next month, and the market tends to test the critical levels beforehand the big event. I am not ruling out the chance of breaking 100 and going a lot lower from here.
For me personally, I expect, given the choice of exiting or remaining within the Eurozone, the Greek people would choose a right one, which is remaining within Euro bloc, no matter how hard the austerity measures would be. Eventually, I think Euro is going to find its bottom and then start edging higher gradually. Greece remaining within Eurozone does not offer any solvation. It is not the answer to all the problems. At least they could avoid the vast consequences, which is exiting Euro, hyperinflation and getting back to the Drachma. That is something that we do not want to see, but I am not ruling out the potential for that. Therefore, I do not exclude the chance of breaking 100, but I think the level around 100 for EUR/JPY is a bit overdone. I forecast a better prospect for the Euro: a rebound around 1.30 for EUR/USD and 1.04-1.05 for EUR/JPY. It will be probably more stable and comfortable level for the EUR/JPY. It is a bit undervalued in terms of EUR/JPY, while USD/JPY is somewhere close to the comfortable area for the time being.
What impact might have Fitch rating cut on the Yen?
As long as the consumption rate hike is on agenda, it could not give much serious impact to the Japanese Government Bond market. In the short run the Japanese investors do not care about ratings of JGBs. They have no other choice but to invest into JGB. This is on the assumption that the Japanese government can hike consumption tax rate and eventually resolve the mounting debt problems, no matter how much time it takes. However, in a month time we will see the consequence from the current diet and the parliament's decision to hike rate or not. That is going to be a lot more important element in terms of the Japanese finance. By then assuming they fail to defend their fiscal health, the downgrading takes place. At the same time it will only affect JGB prices. I am expecting a lot weaker JGB for the months to come, and over the years we will see a quite serious problem with Japanese finance, pretty the same as Europe currently has with the Greece issue at the moment. I think things like that may happen to Japan as well if not worse.
Downgrading does not really downgrade itself, and does not affect too much on the JGB prices. I assume even other rating agencies like S&P, Moody's may cut Japanese ratings, but I do not see too much impact from those. Only when it comes to mixture of prospects of worsening the Japanese finance given the inability to hike consumption tax rates as well as the downgrading takes place more or less the same time, then market players may face serious things and start considering to punish JGB seriously. I think downgrading itself does not give much impact to that. But if you put that into context of the Japanese fiscal problem, they may have greater impact in the future.
What is your forecast for EUR/JPY and USD/JPY for the Q3? What will be the main drivers for the Yen's performance?
I would expect EUR/JPY to trade at 1.05, and USD/JPY at 82, thus I see a lot weaker Yen from here. All depends on the June decision, whether the Japanese officials can hike consumption tax rate or not. My bet is that they cannot, at least in a practical way. There are discussions that the policymakers are going to add some conditions, when the nominal GDP growth exceeds 3% of something. Only then they can hike consumption tax rate from current 5 % to 7%. Nominal growth in Japan from 1% to 3% is a dream, and it has never taken place while I am alive. This is effectively saying that the Japanese government cannot hike tax rate. Thus, all depends on the outcome from the June discussion in the parliament of the country. My bet is they cannot ever increase the consumption tax rate and that is going to damage the credibility of Japanese government finance and eventually push JGB and the Yen lower.