Helaba Research
FX FOCUS
25 January 2017
Japanese yen
AUTHOR
Christian Apelt, CFA
phone: +49 69/91 32-47 26
[email protected]


EDITOR:
Claudia Windt
PUBLISHER:
Dr. Gertrud R. Traud
Chief Economist/
Head of Research
Helaba
Landesbank
Hessen-Thüringen
MAIN TOWER
Neue Mainzer Str. 52-58
60311 Frankfurt am Main
phone: +49 69/91 32-20 24
fax: +49 69/91 32-22 44

The surge of the US dollar has run into its limits against many currencies. The Turkish lira
and the Mexican peso slumped.
The Japanese yen was among the clear losers in the wake of the US presidential election –
the most recent recovery notwithstanding. The reflation optimism and the higher interest
rates in the US had a negative impact especially on the Japanese zero interest rate
currency. The expansionary monetary policy is likely to continue in Japan. However, by now
the yen is once again very favourably valued. Japan’s current account surplus is
approaching old records. The Yen, in particular, should profit from the expected waning of
the Trump euphoria, even against the euro.
Helaba Currency Forecasts
Performance on a month-over-month basis
% vs. euro compared to the previous month (from 12/26/16 to 24/01/17)
US dollar
-2,6
Japanese yen
0,3
British pound
-0,7
Swiss franc
-0,1
Canadian dollar
0,0
2,7
2,3
New Zealand dollar
1,4
Swedish krona
1,4
Norwegian krone
Czech koruna
0,0
Polish zloty
0,8
Hungarian forint
-0,3
This publication was very
carefully researched and
prepared.
However,
it
contains
analyses
and
forecasts regarding current
and future market conditions
that are for informational
purposes only. The data is
based on sources that we
consider reliable, though we
cannot
assume
any
responsibility for the sources
being accurate, complete,
and
up-to-date.
All
statements in this publication
are
for
informational
purposes. They must not be
taken as an offer or
recommendation
for
investment decisions.
Australian dollar
Russian ruble
0,3
Turkish new lira
-9,5
South Korean won
0,3
Chinese yuan
-1,5
Indian rupee
-3,1
2,0
0,9
-6,7
South African rand
Brazilian real
Mexican peso
■ Core currencies ■ Rest of G10 ■ Currencies of emerging markets
Sources: Bloomberg, Helaba Research
HELABA RESEARCH · 25 JANUARY 2017 · © HELABA
1
FX FOCUS JAPANESE YEN
JPY: Resilient
Movement came into the currency market with the US presidential election. The US dollar was able
to appreciate against most currencies, but especially against three currencies: while the slump of
the Turkish lira can be explained chiefly with domestic problems, the Mexican peso is considered a
clear “Trump victim”. Likewise, the Japanese yen posted massive losses. The yen received few
impulses from Japan itself, most recently. Rather, the yen suffered from the success of Donald
Trump. But is the weakness of the Japanese currency in fact justified?
Strong US dollar?
To be sure, the “Trump mania” lost some of its vigour most recently in the financial markets. Still,
the opinion prevails that the US currency will gain ground as a result of Trump’s policies, especially
also against the yen. This is driven by the idea that a reflation policy in the US will lead to
accelerated interest rate hikes and that the Greenback will profit from the rising yield advantage,
especially since Japan’s monetary policy will remain expansionary. The US dollar surged from 105
to more than 118 yen, even as it fell back to 113 yen most recently.
Shortly after the beginning of Trump’s presidency, however, there are considerable uncertainties
about his economic policy. The extent and timing of tax cuts and spending programs are
completely open. Their effect on inflation is often overestimated. As a result, the expectations of
several US interest rate hikes this year could be overblown. Moreover, the strong US dollar should
be a cause of concern to the US central bank. Donald Trump, for one, is no fan of a strong
currency (“The strong dollar is killing us”).
Expectations about US rates driving the dollar-yen
Japan once again with a high current account surplus
JPY
% of GDP
% points
Sources: Macrobond, Helaba Research
Sources: Macrobond, Helaba Research
Moderate growth
Impulses from Japan itself remained modest. Growth is proving fairly steadfast, the GDP likely
expanded by right around 1 % in 2016. The sentiment indicators rose most recently. Still, there is
little to argue in favour of a substantial economic invigoration in Japan; rather, the indications
continue to point to very moderate growth.
Current account balance
clearly in the black
However, Japan’s foreign trade data are strikingly positive. In the wake of the serious earthquake
in March 2011, the trade balance slid noticeably into the red. Because of the shutdown of all of its
nuclear power plants, the country was forced to import substantially more energy resources. By
now the first nuclear power plants have been brought back on line. Most of all, however, the slump
in oil prices improved the trade balance. In addition, Japan’s real exports rose, even if the volume
rose noticeably only from the middle of 2015. The massive yen depreciation that began at the end
of 2012 thus exerted an effect with a considerable time lag, at most. Even clearer in the black than
the trade balance is the current account balance, which includes especially capital income. With a
surplus of around 4 % of GDP, it is approaching the glory days. The foreign trade numbers argue
clearly for an appreciation of the yen.
HELABA RESEARCH · 25 JANUARY 2017 · © HELABA
2
FX FOCUS JAPANESE YEN
Longer-term valuation indicators also argue in favour of the Japanese currency. Measured in terms
of purchasing power parity, the yen is clearly undervalued against the US dollar, especially if one
adjusts for the mean deviation. The real, trade-weighted yen index is also at a very low level, even
if the lows of 2014/15 are not being reached. It is true that such inaccurate valuations can persist in
the currency markets for some time. However, the risk of noticeable exchange rate corrections
grows even without any striking changes in the fundamental environment. As a reminder: between
the middle of 2015 and the middle of 2016, the yen appreciated nearly 20 % against the US dollar!
Is Japan the true
currency manipulator?
With its undervalued currency and the large current account surpluses, the protectionist US
president Trump would actually have an appropriate target in Japan. At this time the charge of
currency manipulation, even if only indirectly via the asset-buying program, applies to Japan better
than it does to China. To date, Japan has not attracted Trump’s attention, with the exception of the
case of Toyota. According to theory, the yen could lose even more ground following the imposition
of trade tariffs on Japan, but in practice this is not invariably the case. Instead of tariffs, the more
elegant and harmless overall economic variant would be an appreciation of the Japanese currency.
Yen clearly undervalued against the US dollar
Japan’s inflation close to zero
JPY
% yoy
* around 12.4 % adjusted purchasing power parity;
Sources: Macrobond, Helaba Research
Sources: Macrobond, Helaba Research
Bank of Japan remains
expansionary
For now, the Japanese central bank will remain on its expansionary course. From its perspective,
inflation continues to be too low. To be sure, the overall rate rose (as it did all over the world) to
0.5 % thanks to energy prices. However, the core rates continue to hover around the zero mark.
The Bank of Japan decided back in September to control the yield curve with its asset purchase
program of up to 80 trillion yen per year. That is to say, the yield on 10-year government bonds is
supposed to hover around the mark of 0 %. And the central bank was able to do just that. The
inflation trend argues for a continuation of the expansionary policy, though additional measures
should not be expected. However, reactions to political pressure cannot be ruled out.
Expectations about a US reflationary policy have caused the yield disadvantage of the yen to
widen – at times by more than half a percentage point on longer maturities. As a result, the dollaryen exchange rate jumped up. However, in terms of a long-term comparison, the yield difference is
not very striking for ten-year maturities, let alone for two-year maturities. The same holds for the
inflation-adjusted interest rate spreads. The main argument for a higher dollar-yen exchange rate
thus rests on shaky foundations, especially when the interest rate expectations in the US will ease
again.
HELABA RESEARCH · 25 JANUARY 2017 · © HELABA
3
FX FOCUS JAPANESE YEN
Turnaround by speculators as contraindicator?
26-week change in % points of open interest
Euro with minor yield advantages over the yen
JPY
JPY
Sources: Macrobond, Helaba Research
Yen appreciation
in 2017
% points
Sources: Macrobond, Helaba Research
Investors with a speculative orientation have carried out an aggressive turnaround with respect to
the dollar-yen exchange rate and are now betting against Japan’s currency. However, this can also
be taken as a contraindicator, as the most recent yen recovery underscores. The dollar-yen
exchange rate has also lost the momentum from technical factors. Even if another flare-up of the
dollar strength is possible over the short term, the risk-reward profile of the dollar-yen exchange
rate is clearly pointed downward. The US dollar should drop back down to 100 yen over the course
of the year. The differences or inaccurate valuations of the yen are less pronounced vis-à-vis the
euro. As a result, the euro-yen exchange rate will presumably weaken less robustly and drop to
115 by the end of 2017.
Helaba Currency Forecasts
Performance
year to date 1 month
vs. Euro
current*
Q1/2017
Forecast horizon at end ...
Q2/2017
Q3/2017
Q4/2017
(vs. Euro, %)
US dollar
-2,0
-2,6
1,07
1,15
1,15
1,15
1,10
Japanese yen
0,7
0,3
122
115
115
121
115
British pound
-0,4
-0,7
0,86
0,90
0,90
0,90
0,85
Swiss franc
-0,2
-0,1
1,07
1,08
1,08
1,10
1,10
Canadian dollar
0,1
0,0
1,41
1,55
1,53
1,52
1,49
Australian dollar
3,1
2,7
1,42
1,53
1,49
1,47
1,45
Swedish krona
0,8
1,4
9,50
9,30
9,20
9,10
9,00
Norwegian krone
1,4
1,4
8,96
8,90
8,90
8,80
8,70
Chinese yuan
-0,5
-1,5
7,38
7,94
7,94
7,99
7,70
vs. US-Dollar
(vs. USD, %)
Japanese yen
2,8
2,9
114
100
100
105
105
Swiss franc
1,8
2,6
1,00
0,94
0,94
0,96
1,00
Canadian dollar
2,2
2,7
1,32
1,35
1,33
1,32
1,35
Swedish krona
2,9
4,1
8,85
8,09
8,00
7,91
8,18
Norwegian krone
3,5
4,1
8,35
7,74
7,74
7,65
7,91
Chinese yuan
1,3
1,3
6,86 1,57
6,90
6,90
6,95
7,00
US-Dollar vs. …
(vs. USD, %)
British pound
1,5
1,9
1,25
1,28
1,28
1,28
1,29
Australian dollar
5,2
5,4
0,76
0,75
0,77
0,78
0,76
*24.01.2017
Sources: Bloomberg, Helaba Research 
HELABA RESEARCH · 25 JANUARY 2017 · © HELABA
4
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