JPY: Implications of falloff – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, suggests that the risk of USD/JPY drop below ¥100 retreats for now with absorption of selling needs at ¥105.

Key Quotes

“Overblown expectations regarding the Japanese macroeconomy these past two weeks, especially in overseas markets, are gradually being reassessed. As the projected scale of the government's economic package has ballooned from ¥10trn to ¥20trn to ¥20-30trn, talk of a helicopter money scheme has emerged, prompting foreign investors to buy Japanese stocks and the USD/JPY.

Our economists have maintained a more sober view. We see the BoJ could lower its rates by 10bp next week while increasing its ETF and J-REIT purchasing to heighten the impact. A fixed-term increase in JGB purchasing is also possible. Nevertheless, however large the headline figure, we estimate that “real water” in the package will be ¥5trn at most and that any new JGB issuance will be even lower. We see little chance of a radical helicopter money policy beyond the present QQE and question the effectiveness of such policy.

If events go as we expect, overseas investors are likely to be disappointed. Still, we feel that the brief rebound in the USD/JPY to ¥107, propelled by solid US economic data, helped absorb the USD-selling orders placed by an estimated 30% of major exporters at their internal rates of ¥105. An estimated 50% of major exporters should continue to cap their dollar sales at their internal rates of ¥110, but fears of a yen upsurge have eased at the ¥105±3 range.

We had seen a 70% chance that the USD/JPY would slide below ¥100 after the Brexit win in the UK referendum. Our forecast was ¥97 at end-September and ¥94 at end-December in the belief that a sharp fall below ¥100 would provoke Japanese hedgers to raise their USD-selling orders at ¥100, offering powerful resistance to a market comeback. USD-sales needs disappeared at around ¥105 with the present rally, and we now feel that the chance of a drop below ¥100 in the near term is 50%.

One fortunate development for Japan is that it has gained more time to assess just how sustainable the US economic recovery will be. However, it is still unclear whether US growth will attain cruising speed. Given the recent market swings from bear to bull and back in every several months, we feel that a decline below ¥100 is a bigger risk over the medium term than a rebound to over ¥110. For now, we should be aware of the possibility of market disenchantment over Japanese policy.”