Yen, oil and the trade deficit correlations - Nomura

Analysts at Nomura explained that in estimating the Japanese trade balance, we assume no change in the recent Japanese trade structure, and in the case of USD/JPY being in a range of 115-120, close to the level when this report was written, we estimate a crude oil price of $65/bbl as the yardstick for the trade balance turning into a deficit.

Key Quotes:

"In the case where crude oil prices are at $55/bbl, close to the level when this report was written, our estimates indicate that a trade deficit would only arise if USD/JPY reached 140. Crude oil prices have a major impact in our estimation of the trade balance.

If crude oil prices rose sharply and the trade deficit became very large, there could be pressure on the yen to depreciate from the standpoint of actual demand. In FY13-14, trade deficits of ¥6-10trn were the focus of attention as one factor behind yen depreciation. If there were a large trade deficit, we would also need to watch for a pattern of higher crude oil prices leading to a trade deficit, in turn leading to yen depreciation and a larger trade deficit and rising inflation."