Japan and Yen at risk again



Following Japanese negative trade balance on the 19th of August, it would be interesting to take a break and step back to see the big picture regarding the Asian country's trade history. It has been recording various surpluses from 1970 to 2010, surpluses caused by new trending products and high export level. Touching its peak till 2011, Japan's Yen proved to be one amongst the safest haven for investment. Tsunami and Earthquake in March 2011 caused the first trade balance deficit, the highest the country experienced, alongside China and Russia. It would also be good to keep tabs about the “Lost Decade”, where growth barely crossed the 2% threshold.

Back in time

In the past year, Japan's Current Account surplus declined to 0.7% of Gross Domestic Product. Again, weaker exports and private consumption were the main culprits. Japan decided to retaliate, in kind. Abe Shinzo increased government spending and installed a central banker who is not afraid to empower aggressive monetary policy. What happened as a result? No much move from the economy was seen in the short, medium and long term. Of course, the economy's other features such as local production and employment rocketed during this period. The markets retaliated and this caused the Yen to drop 20% lower against the greenback. Ultimately, currency devaluation means a cut off in exportation of the country and Japan got a blow.


Let bygones be gone and let's move to Q3. After the contraction in this quarter, all eyes are laid upon whether growth will pick up in Q3, for Shinzo Abe to proceed with a further increase in consumption levy. It is known to everyone that Japanese are amongst the world's most reluctant taxpayers, especially when it comes to the famous VAT. If growth picks up as per forecasts, Shinzo will stick to his plan of lifting levy up to 8% by 2015. Steps to be used for this to happen are radical monetary loosening by the (BoJ) and a fiscal stimulus, which will jolt consumers out of their deflationary mindset and pushing firms to invest more and more. Good idea? Not so sure… An alternative to that might be to lift taxation more gradually. To be more explicit, given the fragility of the Yen, levy could be raised in increments of 1% over 5 years. This might increase consumer confidence in time and push the Yen higher against its counterparts on the market.

What about the Yen?

What about the Yen?Good piece of history up there, but what about the Yen in its future days? For the time being, the Yen is climbing as tensions in Iraq and Ukraine are spurring demand for safe haven assets, but for how long? What might be the drivers for the Asian currency through Q3? BoJ's price target might be endangered, as the market is likely to price in for further expansionary measures. This is a quite interesting dynamic: if recovery is stronger, de facto, the Yen will be pushed higher due to market price out for further monetary easing. However, stronger Yen increases the chance for further easing. As we can see, most of the inflationary figures seen so far were due to the depreciation of the JPY until last year's Q4. It can be therefore understood that the Yen can prove to be a safe haven, but will be highly affected by global risk issues.

Warren Tancredi By: Warren Tancredi