Helaba Research
FX FOCUS
28 May 2013
Japanese yen
AUTHOR
Christian Apelt, CFA
phone: +49 69/91 32-47 26
[email protected]
EDITOR:
Dr. Stefan Mitropoulos


PUBLISHER:
Dr. Gertrud R. Traud
Chief Economist/
Head of Research
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 US dollar has shown itself to be very solid in recent weeks, but the euro, too, was able
to gain against many currencies. In spite of a slight recovery, the Japanese yen was among
the losers, and commodity currencies even weakened substantially.
The Japanese yen depreciated markedly in recent months. By now, however, indications of
at least a temporary stabilization are multiplying. The yen is currently undervalued rather
than overvalued and oversold. In the face of initial successes, the political pressure
regarding a weaker currency should ease somewhat, especially since the rise in capital
market yields is causing concerns. Over the long term, however, the risks predominate.
Helaba Currency Forecast
Euro performance on a month-over-month basis
% vs. euro compared to the previous month (from 04/26 to 05/27/13)
US Dollar
0,8
Japanese Yen
-2,2
British Pound
-1,7
Swiss Franc
-1,4
Canadian Dollar
-0,9
Australian Dollar
-5,5
New Zealand Dollar
-4,0
Swedish Krona
-0,3
Norwegian Krone
0,8
Czech Koruna
-0,8
Polish Zloty
-0,9
4,5
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.
Hungarian Forint
Russian Ruble
0,4
Turkish New Lira
-1,8
South Korean Won
-0,3
1,5
-1,7
Chinese Yuan
Indian Rupee
South African Rand
-4,5
-2,0
-1,9
Brazilian Real
Mexican Peso
■ Core currencies ■ Rest of G10 ■ Currencies of emerging markets
Sources: Bloomberg, Helaba Research
HELABA RESEARCH 28 MAY 2013· © HELABA
1
FX FOCUS JAPANESE YEN
JPY: recovery chances with risks
Until recently Japan, still the third-largest economy in the world, was leading a rather shadowy
existence. But that has changed since Shinzo Abe, president of the LDP, became Prime Minister
following elections to the Lower House at the end of 2012. The new government is proving very
active and is trying to stimulate the previously very moderate growth through new spending
programs as well as a very expansionary monetary policy. Once the change in government
became evident, the Japanese yen depreciated strongly, and in 2013 it has been the biggest loser
in the currency market. One US dollar rose from less than 80 to at times more than 103 yen, one
euro at times cost more than 133 yen. On the other hand, the stock market in Japan boomed, even
if it suffered a notable setback most recently.
Expensive yen worsened
Japan’s trade and current
account balance
From the beginning of the financial crisis in 2007 until the fall of 2012, the yen was still the high-flier
among currencies. This created an overvaluation, even if that in the nineties was more extreme. In
Japan, the export industry suffered increasingly from the expensive yen. But there was another
reason why the trade balance slid into the red and even the once proud current account surplus
largely evaporated. In the wake of the earthquake, tsunami, and nuclear disaster in 2011, all
nuclear plants were temporarily turned off, which forced the country to cover its energy needs
increasingly through imports, above all liquid gas. Overall economic growth in recent years was
very meagre. A slight deflation, i.e. falling prices, continues to prevail in Japan.
Current account balance on the downslope
Purchase programs by the BOJ already priced in
% of GDP
% of GDP
Sources: Macrobond, Helaba Research
* under the following assumption: BoJ doubles the monetary base by the end of 2014, the
Fed slowly scales back its purchase program in the second half of 2013; Sources:
Macrobond, Helaba Research
Bank of Japan wants to
double monetary base
The new government is now attempting a liberating blow. Over the short term, higher government
spending is to promote growth. The formally independent Bank of Japan (BoJ) is now trying, at the
request of the government, to achieve an inflation target of 2 %. The BoJ got a new Governor in
Haruhiko Kuroda, who decided on aggressive measures at his very first meeting. The BoJ is
considerably expanding its existing purchase programs. The monetary basis – that is, the central
bank’s money supply – is to double by the end of 2014 through the acquisition of government
bonds. With that, the BoJ surpasses even the other large central banks from Europe to the US in
the scope of the quantitative measures. It is no surprise that the yen pulled back noticeably. To be
sure, Japan’s central bankers deny that they are deliberately weakening the yen. However, it is
likely that the depreciation of the currency is an essential goal of the new monetary policy.
However, the planned expansion of the monetary base relative to US policy should already be
more than priced in in the current dollar-yen exchange rate. Although BoJ purchases on an even
larger scale by the end of 2014 cannot be ruled out, for now they are not on the agenda.
In the context of the new policy we frequently heard the idea of a “currency war,” which has already
been increasingly used in recent years. In a few countries critical comments were also voiced from
the official side, even though the charges remained muted. After all, the BoJ is merely using the
same quantitative instruments employed by other central banks. Direct interventions in the
HELABA RESEARCH · 28 MAY 2013· © HELABA
2
FX FOCUS JAPANESE YEN
currency market, which the BoJ carried out in the past following strong appreciations in the
currency, are currently not taking place and probably won’t in the future, either.
First successes in
economic growth
What are the chances for the so-called “Abenomics”? At least the mood in the economy has
brightened markedly. In the first quarter of 2013, growth jumped noticeably to nearly 1 % over the
previous period. Abe can be satisfied at least with the beginning of his policy, especially since he is
doing well in the current polls. In July he and his LDP should regain the majority in the Upper
House – also a goal of “Abenomics” – and thus consolidate his leadership within the party.
Incidentally, since 2006, when Abe was Prime Minister once before, no head of the government
has been able to hold his office for much more than a year. After fiscal and monetary policy, the
government wants to carry out structural reforms as the third pillar. As we know, these measures
are more difficult to realize. But they might be decisive in determining whether the new policy will
end up setting off merely a flash in the pan.
Yen already undervalued on a trade-weighted basis
Low interest rate differentials support the yen
Index
JPY
Sources: Macrobond, Helaba Research
Sources: Macrobond, Helaba Research
% points
A weak currency can provide growth impulses. Except that depreciation does not work over night
and has only qualified success. The export economy must also produce products that are in
demand by the markets. Most recently, Japan’s industry has fallen behind in some sectors. The
Japanese currency can be described as undervalued, which should help. At least real exchange
rate indexes or purchasing power parities indicate as much. The differences in capital market
interest rates against the euro or the US dollar currently also reflect a marked undervaluation.
Risk of rising interest rates
“Abenomics” certainly bears risks. Japan’s budget deficit remains high at around 10 % of GDP, and
sovereign debt, at 214 % (definition of OECD) at the end of 2012, was the highest in the world. To
be sure, there was a decision under Abe’s predecessor to raise the VAT in two steps in 2014 and
2015 from 5 % to 10 %. But this alone will not fix the budget, and if need be it can even be
suspended. The high level of national debt is bearable only because the interest rate level is very
low, thanks to the BoJ purchases. Most recently, the yields on ten-year bonds rose from 0.5 % to
at times nearly 1.0 %. The interest rate level is not yet a cause for concern, but the rise might be. If
Abe’s policy bears fruit and not only growth improves, but inflation also rises, there is a risk that
capital market rates continue to climb and impair the positive impulses of the depreciation.
Japanese investors are apparently beginning to question the attractiveness of these bonds. In
addition, domestic savings in Japan is declining long term, which is reducing the potential demand
for bonds. Foreign investors are shying away from the market, as it is. Given the dimension of the
monetary policy measures, inflation could in fact rise noticeably if a process of rising prices does in
fact get started. In that case, the yen, in spite of its current undervaluation, would continue to be
very unattractive. There have already been critical statements on the part of some central bankers,
which questioned the very expansionary measures because of the repercussions for the bond
market.
HELABA RESEARCH · 28 MAY 2013· © HELABA
3
FX FOCUS JAPANESE YEN
Bond market reacts different than expected
Large bets against the yen as counterindicator
%
% share of open interest
Sources: Macrobond, Helaba Research
Sources: Macrobond, Helaba Research
Yen facing at least
temporary recovery
JPY
However, it is not entirely unlikely that “Abenomics” will tend to fall flat, that is, the growth effects
will remain temporary and the stubborn price stability will persist. If the aggressive course of
monetary policy is then not additionally expanded, at least the valuation argues in favour of the
yen, and the Japanese currency could thus recover. Short term there are in any case arguments
for a countermovement: the Japanese currency is technically strongly oversold and there are large
speculative positions against the yen, which should be seen as a counterindicator. Moreover, the
political pressure regarding a depreciation seems to be easing for now. As a result, the dollar-yen
exchange rate should drop well below the mark of 100 again over the course of the year, and one
euro could ease to below 125 yen. Beyond tactical opportunities, however, the yen remains a very
risky currency for investors.
HELABA RESEARCH · 28 MAY 2013· © HELABA
4
FX FOCUS JAPANESE YEN
Helaba Currency Forecasts
Performance
year to date 1 month
vs. Euro
US Dollar
current*
Forecast horizon at end ...
Q2/2013
Q3/2013
Q4/2013
Q1/2014
(vs. Euro, %)
2,0
0,8
1,29
1,30
1,30
1,25
1,25
Japanese Yen
-12,3
-2,2
131
130
123
122
122
British Pound
-5,2
-1,7
0,86
0,86
0,85
0,85
0,85
Swiss Franc
-3,0
-1,4
1,25
1,25
1,30
1,25
1,25
Canadian Dollar
-2,1
-0,9
1,34
1,30
1,31
1,29
1,29
Australian Dollar
-5,4
-5,5
1,34
1,30
1,33
1,32
1,32
New Zealand Dollar
-0,5
-4,0
1,60
1,57
1,59
1,56
1,56
Swedish Krona
-0,1
-0,3
8,59
8,45
8,40
8,30
8,30
Norwegian Krone
-2,9
0,8
7,56
7,40
7,30
7,20
7,20
vs. US-Dollar
(vs. USD, %)
Japanese Yen
-14,1
-2,9
101
100
95
98
98
Swiss Franc
-5,0
-2,1
0,96
0,96
1,00
1,00
1,00
Canadian Dollar
-4,1
-1,7
1,03
1,00
1,01
1,03
1,03
Swedish Krona
-2,1
-1,1
6,64
6,50
6,46
6,64
6,64
Norwegian Krone
-4,8
0,1
5,85
5,69
5,62
5,76
5,76
-2,4
1,51
1,51
1,53
1,47
1,47
US-Dollar vs. …
British Pound
(vs. USD, %)
-7,1
Australian Dollar
-7,3
-6,2
0,96
1,00
0,98
0,95
0,95
New Zealand Dollar
-2,4
-4,7
0,81
0,83
0,82
0,80
0,80
*27.05.2013
Sources: Bloomberg, Helaba Research
HELABA RESEARCH · 28 MAY 2013· © HELABA
%
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