Colin Asher
Senior Economist at Mizuho Corporate Bank
I do not have a particularly excited forecast for the year, I guess it is going to be rather flattish. My official forecast for the USD/JPY is around 80 at the end of Q4.
In the short-term I think there is a little bit to do with the US Treasuries. The two-year yield spread between US Treasuries and JGBs (Japanese Government Bonds) has been a pretty accurate reflection of developments in this pair. The US yields are moderately high, but they have not moved considerably higher, the movements in yields, especially in the short-term have been quite limited owing to the Fed's promise to keep interest rates low. In the very short time we have seen some people removing positions which is giving it a little pop to the upside. In my opinion, this is not a beginning of a big move-I see a continuing lack of willingness of Yen sellers. For the Yen to move significantly higher the Japanese investors have to start selling the Japanese currency and to look for higher yields overseas. And that sort of environment generally happens across the risk on environment with rising yields overseas. Unfortunately, I do not see this kind of development being particularly strong in the first half of the year.
The Japanese investors are very shell-shocked and extremely cautious. I do not think you can find many big Japanese life insurers and individuals looking for high yields overseas and on the side. However, I do not regard it as a medium-term strong development.
I assume there is better hope for this type of change in the second half of the year, where we will see better data, the policy easing that have already been implemented by the Bank of England, the ECB and across over the Asian banks as well. These factors give a more solid platform for risk assets, better performance and then in that case the JPY gets weaker. However, I guess it is going to be reasonably stable in the first half of the year.
The interventions which the Bank of Japan implements from time to time are effective in the short-term. It struggles to change a very large picture. The way I look at it is that Bank of Japan is locked in not quantitative easing, but in sort of competitive easing. The window for BoJ's easing is going to close because the macro outlook for Japan should start to get a little bit better. Therefore, it will be easier for the BoJ to rebut the pressure from politicians. Japanese politicians are willing the BoJ to strip more, but BoJ is reluctant to see the Yen move any stronger, it has quite bullish CPI forecasts. It is attempting to slow the rate of the appreciation of the Yen and my guess that the next intervention may be at the level of around 75 if the currency moves down there. Moreover, as long as the macro environment does not shift strongly, the prospect of the BoJ being there is sufficient to keep the USD/JPY in a narrow range.