Forex Medium-Term Outlook
1 May 2015
Mizuho Bank, Ltd.
Forex Division
【Contents】
Overview of outlook ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・P. 2
USD/JPY Outlook – Cannot categorically predict a weak-JPY scenario for 2016
JPY supply-demand situation – Risks to weak-JPY scenario surface ・・・・・・・・・・・・・・P. 3
U.S. currency policies now and going forward
– USD strength being tolerated for the moment・・・・・・・・・・・・・・・・・・・・・・・P. 5
U.S. monetary policies now and going forward
– From “when will it be implemented” to “how many times can it be implemented” ・・・・・・・・ P. 12
Fundamental scenario-related risks
– Not discounting the 2016 JPY weakness scenario
・・・・・・・・・ ・・・・・・・・・・ P. 13
EUR Outlook – Continued outlook for short-term weakness and medium/long-term
strength
ECB Monetary Policies Now and Going Forward – Emphasizing credit function improvement・・・・P. 13
Supplementary Discussion: The Greek Problem, Now and Going Forward
– Will for Solvency Improvement? ・・・・・・・・・・・・・ ・・・・・・・・・・・・・・・P. 17
Medium-term Forex Outlook
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Mizuho Bank Ltd.
Overview of outlook
Regarding USD/JPY, at least for the current fiscal year, a weak-JPY scenario is forecast to continue from the
supply-demand and interest rate perspectives. The trade balance improvement trend is a risk factor, but at the
present stage, it may simply cause a release of JPY selling pressure while not strong enough to warrant talks of an
increase in JPY purchasing pressure. Rather, within the fiscal year, given the gap between the U.S. and Japanese
monetary policies and Japanese government policies, one would like to assume that the acceleration in foreign
securities investment will shift the basic supply-demand balance in favor of JPY selling activity. My USD/JPY
forecast of 130 within the year is still based on the expectation that the BOJ will implement additional monetary
easing within the year, and while there may be room for arguments regarding the level of JPY going forward, the
direction (JPY weakness) itself is relatively more certain. However, a different scenario may become necessary for
next fiscal year. Foreign securities investments by Japanese investors require that there be a gap between U.S.
and Japanese monetary policies, but “noise” over the USD strength is clearly getting louder in the U.S. It is likely
that the focus of U.S. monetary policies related to rate hikes for the next fiscal year is shifting from “when rate hikes
will start” to “how many times they can be implemented,” and not many people are brimming with confidence in this
regard. Thinking of it this way, it may become necessary to reconsider the outlook for many currency pairs next
year based on monetary policy gaps vis-à-vis the U.S. As a result, we may also need to consider a scenario that
does not involve an out-and-out USD strength.
EUR, having hit a year-to-date low in March, is now experiencing a lull. The gap between the FRB and ECB
monetary policies continues to be too large to do anything about, and given that the Greek problem seems likely to
continue for some time, EUR will inevitably be top-heavy. If one takes into consideration that the Greek situation is
another problem to add to the FRB’s normalization process this summer, we may be entering a phase where parity
could, once again, come into view. However, as I have persistently pointed out in this report, so far as the
fundamentals go, the current EUR weakness is something that should be described as “epic speculation” and its
sustainability is questionable. In the near term, though speculative EUR selling accumulates, the real rate has not
fallen considerably, and the presence of a large current account surplus cannot be ignored as one of the reasons
for this. The Euro zone current account surplus has already surpassed that of Japan in the past, so the real
demand for EUR purchase is likely to be quite high. For instance, one must watch out for a roll back in speculative
positions immediately following the first rate hike by the FRB, amid the sense that all speculative fodder has been
exhausted. This report’s prediction of a reactionary rebound in EUR toward the second half of the forecasting
period is based on such a view
Forecast table summary
Jan-Apr 2015
(Actual)
115.86 ～ 122.04
(119.62)
2015
May-Jun
117 ～ 125
(122)
2015
Jul-Sep
118 ～ 127
(124)
2015
Oct-Dec
120 ～ 130
(125)
2016
Jan-Mar
121 ～ 131
(126)
2016
Apr-Jun
120 ～ 130
(124)
EUR/USD
1.0458 ～ 1.2170
(1.1210)
1.07 ～ 1.15
(1.11)
1.05 ～ 1.13
(1.09)
1.04 ～ 1.13
(1.10)
1.06 ～ 1.15
(1.11)
1.10 ～ 1.18
(1.13)
EUR/JPY
126.94 ～ 145.30
(134.15)
128 ～ 138
(135)
129 ～ 139
(135)
131 ～ 141
(138)
133 ～ 143
(140)
135 ～ 145
(140)
USD/JPY
(Notes) 1. Actual results released on 1 May 2015 around 10am TKY time. 2. Forecast rates are quarter-end levels
Exchange rate trends & forecasts
140
USD/JPY
130
120
110
100
90
80
70
07/1Q 08/1Q 09/1Q 10/1Q 11/1Q 12/1Q 13/1Q 14/1Q 15/1Q 16/1Q
Medium-term Forex Outlook
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Mizuho Bank Ltd.
1.7
175
EUR/USD
EUR/JPY
165
1.6
155
1.5
145
1.4
135
1.3
125
115
1.2
105
1.1
95
1.0
07/1Q 08/1Q 09/1Q 10/1Q 11/1Q 12/1Q 13/1Q 14/1Q 15/1Q 16/1Q
85
07/1Q 08/1Q 09/1Q 10/1Q 11/1Q 12/1Q 13/1Q 14/1Q 15/1Q 16/1Q
USD/JPY Outlook – Cannot categorically predict a weak-JPY scenario for
2016
JPY supply-demand situation – Risks to weak-JPY scenario surface
Demand-related risks to weak-JPY scenario surface
（Bill yen）
As I argued in last month’s edition of this report,
Japan's trade balance progression
2,000
JPY’s changing supply-demand situation is
1,500
being closely watched as one of the factors that
1,000
could heighten risks for the USD/JPY outlook
500
0
going forward. Japan’s March Trade Balance,
-500
which was published in April, was +JPY 229.3
-1,000
billion, the first trade surplus in 33 months, since
-1,500
June 2012. The trade balance has been
-2,000
improving owing to both export growth and
-2,500
import decline, and it seems that the YoY
-3,000
-3,500
decrease in imports against the sharp fall in
07/01
08/01
09/01
10/01
11/01
12/01
13/01
14/01
15/01
crude oil prices continues to have an effect.
（Source）Datastream
Although the shift to a trade surplus is
(Note) Bold line refering to the TB's 6 month average
promoting the ongoing intensification of
cheering for the “JPY depreciation → export volume growth” scenario as evidence for the effectiveness of
government policies, as explained below, the export volume index is not rising as much as the real export index.
The export growth appearing in GDP statistics is simply the result of the upward tugging of export volume owing
to growth in real exports that reflects the rising level of export product added value, and there is a need to take
extreme care in evaluating the effect of such export growth on the real economy.
Having said that, regardless of background factors, when it comes to forex forecasts, the diminishing JPY depreciation pressure due to the supply-demand situation cannot be ignored. Since March 2011, professional
voices have been inclined to assert that “the supply-demand situation will tend to promote progressive JPY
depreciation going forward.” The recent improvement in the trade balance against the backdrop of the sharp fall
in crude oil prices since last autumn should probably be considered a risk scenario (I have discussed all the risk
factors in a single section toward the end of this report).
YoY pace of improvement seems excessive
The Trade Balance is improving at an
extremely rapid pace in YoY terms, but its
sustainability is doubtful. Looking at figures by
country, the U.S. contribution to improvement in
the March trade balance is overwhelmingly
conspicuous. If one considers the outlook for
improvement over a longer time frame,
however, it is important to note that most of
Japan’s trade deficit is in trade with the Middle
East (see graph). As mentioned above, the
logical basis for attributing Japan’s trade surplus
（Tril yen,
YoY change）
Trade balance development
（by country & region, YoY change）
12
Others
EU
US
China
10
8
6
Middle East
Latin America
Asia excl China
Overall
4
2
0
-2
-4
-6
1H 2012
2H 2012
1H 2013
2H 2013
1H 2014
2H 2014
JAN-MAR
（Source）INDB
Medium-term Forex Outlook
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Mizuho Bank Ltd.
to the export-boosting effect of JPY depreciation is weak, and it should be understood that the surplus is primarily
resulting from a fall in exports owing to the crude oil price drop. Moreover, as mentioned, Japan’s imports during
the January-March 2014 quarter surged due to accelerated demand, causing a particularly strong trade balance
deterioration, so the kind of large-margin improvement trend shown in the graph should not be expected to
persist going forward.
Basic JPY supply and demand
Basic supply/demand balance
In this publication, I continue to see
（USD/JPY）
（Tril yen）
reflected in balance of international payments
the direction of USD/JPY as matching
25
70
JPY long
the direction of the basic supply and
20
80
↑
15
demand balance 1 (hereafter “basic
↓
90
JPY short
10
supply and demand”) – this is an
5
100
original indicator computed by myself,
0
and I use it as a guide when
110
-5
formulating the outlook. As I have
-10
120
-15
pointed out many times, except during
130
-20
Period where USD/JPY remained unafflected by basic supply/demand
the phase between 2005-2008, when
＝JPY carry expansion ＆retraction？
-25
140
the basic supply and demand was at
2000
2002
2004
2006
2008
2010
2012
2014
Inward securities investment
the mercy of an expansion/contraction
Outward securities investment (others)
in carry trades, there is the strong
Direct investment
Current account balance（excluding re-invested profit）
impression that its direction has been
Basic supply/demand balance
Basic supply/demand balance（4-quarter MVA）
consistent with that of USD/JPY by
USD/JPY（right axis, reversed scale）
and large (only the direction, not the
（Source） Bank of Japan & INDB
level). As the chart shows, the basic
（Notes)） Bold line designates basic supply/demand quarterly average.
The latest Jan & Feb are compounded together
supply and demand trend has begun
Subject:Life insurers, pension funds & individual excluding banks & government sectors
to look up slightly since mid-year last
year, which is contrary to USD/JPY, which rose steeply during the same period (portion inside the solid square in
the chart). Looking back at past trends, one gets the impression that USD/JPY has followed in the footsteps of
the basic supply and demand with a time lag, so, when formulating predictions for JPY rates, the supply and
demand trend of the recent past is a clue. The basic supply and demand trend remains at or below zero as
before; in other words, the balance of supply and demand continues to be characterized by JPY sale > JPY
purchase, but going forward, depending on the domestic and foreign securities investment trends or trade
balance trends based on crude oil prices, the basic supply and demand could become positive again, giving rise
to possible scenario of JPY sale < JPY purchase.
No revival of a virtuous cycle without export volume index growth
There have been scattered comments in the markets attributing the turnaround to a surplus for March to an
international competitiveness improvement induced by JPY depreciation along with an associated rise in export
volume, but it is too early to justify such comments. The principal export volume concept indices designed to
account for the effect of price changes are the export volume index and the real export index. The desired
volume concept is essentially “export value ÷ price” concept, and the difference between the two indices directly
stems from the difference between the “price concepts” that they employ.
The export volume index associated with customs clearance basis trade statistics is based on calculations of unit
product prices in each product category, and it is calculated as “customs clearance-basis export value ÷ export
prices.” This index is appropriate for use when one is seeking a so-called ‘intuitive quantification’ of export volume.
In contrast, the real export index prepared by the BOJ is calculated as “customs clearance-basis export value ÷
export product price index.” The export product price index is designed to “adjust any difference between the old
and new sample prices using the quality adjustment method so that the index reflects pure price changes.”2 This
means, for example, that if a personal computer’s price is held steady while its performance is doubled, then the
real price level would be halved. In other words, even when the actual volume of export transactions does not
change, because the elevation of performance levels will cause the export price index to decline, the real export
index will rise. In the case of the export volume index, the export of one personal computer unit is counted as one
export unit regardless of whether it is an old unit or a new unit with improved performance.
1
While balance of payments statistics are a sum of current account balance, direct investment, and outward/inward securities investment unassociated
with depositary financial institutions and government entities, the statistics are adjusted to calculate the fundamental demand-supply balance by
excluding investment income that remains overseas in the form of foreign currencies. Essentially, the fundamental demand-supply balance focuses on
only the items that are likely to have a direct impact on forex to provide an image of the demand-supply situation. Excluding the “JPY depreciation
bubble” period of 2005-2007, when JPY carry trade transactions and other speculative transactions surged to their peak, the direction of changes in the
fundamental demand-supply balance have generally corresponded to the direction of changes in USD/JPY.
2
Bank of Japan, “Corporate Goods Price Index (CGPI, 2010 base)”
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（Year 2010=100）
Real exports & export volume progression
As has been noted since last year, there has
130
1.15
Real exports
indeed been a recovery in the export volume
Export volume
1.1
120
High-value-added index （right axis）
index, and it may be that this reflects the effect
1.05
of JPY depreciation. Regarding the level of the
110
index, however, it should be noted that the
1
100
export volume index has not recovered to its
0.95
90
pre-financial-crisis level, and this must be
0.9
considered disappointing in light of the dramatic
80
0.85
degree of JPY depreciation that has taken
70
0.8
place since the crisis.
60
0.75
On the other hand, the real export index has
risen considerably, attaining a level comparable
50
0.7
98
00
02
04
06
08
10
12
14
to the pre-Lehman-shock level (see graph).
（Source）INDB
This has directly led to the current growth in real
(Note) Right axis: Real exports index devided by export volume index
exports in terms of GDP statistics, which are
calculated based on the same kind of concept as the real export index. Because of the differences between the
definitions of the indices, the high-value-added index (calculated as “real export index ÷ export volume index”)
has risen to all-time record high levels. In this way, while the rising level of export product added value is a
welcome development, the government’s reflationary policies were designed to elevate the export volume index
and induce an associated rise in manufacturing activities with the objective of initiating a virtuous cycle of
“employment increase → earnings increase → consumption increase → product price increase.”
So long as the rise in real exports is sustained, GDP growth will tend to depend on economic conditions that
promote overseas demand, but to the extent that the rise in export volume targeted by the JPY depreciation
policy does not occur, it would be difficult to theoretically justify efforts to employ monetary easing-centered
policies to promote economic recovery and a general rise in price levels
BOJ monetary policies now and going forward – An autumn of trials awaits the
BOJ
Deadline for price stability target pushed back half a year
At the April 30 BOJ Monetary Policy Meeting, the Policy Board decided by a majority vote to keep the monetary
policy unchanged for some time to come. Policy Board Member Takahide Kiuchi, continuing from the previous
Monetary Policy Meeting, proposed that the Bank conduct money market operations and asset purchases so
that the monetary base and the amount outstanding of its JGB holdings will increase at an annual pace of about
JPY 45 trillion, rather than the present JPY 80 trillion, but the proposal was defeated by a majority vote. The key
phrase related to the timing for reaching the price stability target was changed to, “Although the timing of reaching
around 2 percent depends on developments in crude oil prices, it is projected to be around the first half of fiscal
2016, assuming that crude oil prices will rise moderately from the recent level” – the change was consistent with
what BOJ Governor Haruhiko Kuroda told the Diet beforehand. The definition of “first half of fiscal 2016” is not
certain, but interpreting it literally, one can reason that it indicates “by the end of September 2016.” Note that with
regard to the timing of target attainment, Policy Board members Kiuchi and Takehiro Sato maintained that the 2%
target cannot be reached by fiscal 2017, and Policy Board Member Sayuri Shirai proposed widening the timeframe to something like “in or around fiscal 2016,” but the proposal was rejected.
Naturally, at the press conference, a reporter asked, “Why was there no additional monetary easing even though
the target has not been reached within the 2-year time-frame you assumed?” Mr. Kuroda dealt with the question
with his usual responses, “The basic trend is steadily improving,” “The supply-demand gap has improved to
around 0% and will continue to improve,” and “Inflation expectations are increasing.” In addition, the fact that the
base pay scale this year had been raised to a greater extent than last year was also emphasized. Mr. Kuroda
was able to avoid disappointment by saying, “(If the fundamental trend changes), we will adjust our policies
without hesitation,” but it remains unclear exactly what indicators show the “fundamental trend” in the first place,
making it difficult for market forecasts to be formed. Therefore, the BOJ will probably continue to have to deal with
anxiety over how to handle additional easing speculations once every three months. With the release of the
official statement and the Outlook Report, USD/JPY fluctuated severely for a while, but ultimately returned to the
level before the meeting. One could say that the BOJ was able to skillfully pass the test this time.
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How to read the weak outlook for FY2017
(% vs previ ous yea r)
Taking an overview of the details of the Major outlook by BOJ policy board members
Outlook for Economic Activity and Prices
Core CPI
Real GDP
Context in which tax exemption
(Outlook Report), the price forecasts of
（ex fresh food）
impacts are ignored
policy board members (median value, CPI
-1.0～-0.8
FY 2014
2.8
0.8
excluding fresh food and the impact of the
<-0.9>
consumption tax hike; hereafter “Core
-0.6～-0.4
2.9～3.2
0.9～1.2
Outlook as of Jan
<-0.5>
<2.9>
<0.9>
CPI”) for both FY2015 and FY2016 were
1.5～2.1
0.2～1.2
FY2015
downgraded compared with the forecasts
<0.8>
<2.0>
as of the January interim assessment,
0.4～1.3
1.8～2.3
Outlook as of Jan
<1.0>
<2.1>
from +1.0% to +0.8% for FY15, and from
1.4～1.8
1.2～2.2
FY2016
+2.2% to +2.0% for FY2016 (see chart).
<2.0>
<1.5>
As mentioned above, the timing for
1.5～1.7
1.5～2.3
Outlook as of Jan
<1.6>
<2.2>
achieving the 2% target was pushed back
0.1～0.5
2.7～3.4
1.4～2.1
from “in or around fiscal 2015” to “around
FY 2017
<0.2>
<3.2>
<1.9>
the first half of fiscal 2016.” Note that the （Source）Bank of Japan （Note） ＜＞ is the median estimate by policy board members
price forecast for FY2017, newly published
this time, was +1.9%. Growth forecasts, though slightly downgraded from +2.1% to +2.0% for FY2015, and from
+1.6% to +1.5% for FY2016, remained strong. Growth for FY2017, however, was projected to slump to +0.2%.
The projected slump in prices and growth rates for FY2017 is mainly due to factoring in consumption tax hike
(from 8% to 10%) in April of that year, but it also seems to be taking into account the cyclical economic downturn
coinciding with that period (the Outlook Report mentions that “cyclical deceleration” is one of the reasons for the
predicted economic slowdown.)
Though they have not drawn much attention, the weak forecasts for FY2017 are important for considering the
outlook going forward. My frank impression is that, first of all, if a cyclical economic contraction phase coincides
with a consumption tax hike, one naturally wonders whether the reversal will be merely to the extent forecast by
the Outlook Report. Also, the fact that the BOJ itself considers FY2017 to be a phase of cyclical economic
slowdown (quite aside from the impact due to the consumption tax hike) signifies that, even at the earliest, there
will not be an exit from the current accommodative monetary policies before the second half of FY17. In other
words, it does not seem likely that a stable 2% price growth rate will have been attained even as late as the
second half of 2017. Ultimately, therefore, the present policy of “2% in two years” may take all of Mr. Kuroda’s
term in office (2013 – 2018) to achieve. Irrespective of any rationale that may exist in the background, this is a
scenario very different from what the markets had imagined originally.
The next move may be to go back from “quantity” to “interest rates”
As even the BOJ has repeatedly explained, the reason the deadline for the 2% target has been pushed back is
the sharp decline in crude oil prices since last Autumn. The reason Mr. Kuroda has repeatedly been saying that
prices will accelerate this autumn onward is because that is the exact period when the downward pressure on
CPI due to the sharp fall in crude oil prices will begin to dissipate (of course, that is not the only reason – there is
also the assumption that the supply-demand gap will have contracted over the same period). One of the
footnotes in the Outlook Report says, “this contribution is expected to fall further into negative territory for the time
being, followed by a narrowing in the negative contribution in the second half of fiscal 2015; in the first half of
fiscal 2016, the contribution is estimated to be around 0 percentage point.” In other words, unless crude oil prices
fall another notch this autumn or later, the CPI can be expected to return to the ideal (i.e., 2%) growth rate path
envisaged by the BOJ. Looking at it a different way, if the inflation rate has not become more buoyant as of
autumn, the BOJ will be unable to avoid a monetary easing at that time. It still cannot be said, therefore, that a
monetary easing within the year is impossible.
In addition, there has always been the concern that sustaining the present framework of JBG purchases itself will
become difficult next fiscal year onward, so irrespective of whether one desires it or not, there will be an
automatic contraction of the purchase amount, which could lead to suspicions that the BOJ is implementing
tapering. In this regard, there was a question on April 30th press conference: “Is there a likelihood that the
purchase of JGBs will become difficult in fiscal 2016?” Mr. Kuroda responded to it saying: “We do not believe a
problem will arise going forward,” but at some point, it will become difficult to continue with the planned purchase
amount. There are more than a few who point out that, even if, thanks to the Government Pension Investment
Fund (GPIF) portfolio reshuffling, the purchase amount can be maintained during the current fiscal year, a
technical limit will be reached during the next fiscal year. In other words, this will be a setback for the strategy of
using “quantity” to work on expectations. The BOJ will probably feel the need to take action before suspicions of
tapering really begin to surface.
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What could happen at such a time? Simply speaking, a return to “interest rate” operations can be envisaged.
Given that there was speculation about the elimination of interest rates even at the time of the January meeting,
and that, subsequently, the circulation of government bonds at negative interest rates has become the norm in
the Euro zone, there is no need to pursue “quantity” simply out of a desire to keep interest rates strictly at or
above zero. It is quite conceivable that the BOJ would allow some level of negative interest rates, thereby
avoiding suspicions of tapering and continuing its strategy of working on market expectations. As Mr. Kuroda
himself has said that the bank would do whatever it can to achieve the price stability target at the earliest, there is
no reason to be fixated on “quantity.” Regarding the timing of a monetary easing, going by the current logic, it
seems likely that monetary policy will be kept unchanged at the July meeting, so the October meeting seems
more likely. For the BOJ, it may be an autumn of trials.
Two years since the introduction of QQE: BM, MS and prices
Incidentally, with April, a full two years have
Japan's base money & money supply（≒lending）growth
（JAN 2013=100）
（％）
passed since the BOJ Monetary Policy
1.8
220
Meeting (April 4, 2013) that decided to
200
1.3
introduce the quantitative and qualitative
180
easing (QQE) policy. During the past two
0.8
years, base money (BM) has expanded
160
0.3
+100% from approximately JPY 150 trillion to
140
approximately JPY 300 trillion. (These figures
-0.2
120
are based on statistics for the period from
-0.7
100
March 2013 through February 2015.) During
80
-1.2
the same period, however, the money supply
13/01 13/04 13/07 13/10 14/01 14/04 14/07 14/10 15/01
(MS, M2 + CD) grew only +6.5%, from
CPI core（right axis）
Base money (BS)
Money supply (MS)
approximately
JPY
840
trillion
to
（Source）Bloomberg
approximately JPY 895 trillion, indicating that
(Note) CPI core: excluding impact after consumption tax increase
lending has not grown in step with the
expansion of BM. Essentially, a huge amount of BM has simply been accumulated as excess reserves, and
there has been a continued disconnection between the financial system and the real economy. The
accumulation of excess reserves indicates “exit strategy difficulty,” since financial institutions face a lack of
demand for their loan offerings that is being compounded by the approach of technical limits regarding the
accumulation of excess reserves. From the very beginning, this course of developments has inspired a tendency
toward skepticism regarding reflationary monetary policies on the part of this article and other observers.
However, the Kuroda-led BOJ has been aiming to employ an overwhelming volume of BM to increase inflation
expectations and thereby induce a rise in actual inflation, so the strategy can roughly be described as a “policy
aimed at moving expectations.” For this reason, so long as prices rise, the exit difficulty and technical limits of
asset purchases can be overcome, and it will be possible to view the “increasing prices with money power”
mission as successful. As shown in the graph on the previous page, however, after two years of QQE, the rate of
growth in the core consumer price index (CPI) excluding fresh foodstuffs and the effects of the consumption tax
rate hike fell to the neighborhood of zero in February. Given that growth in core CPI immediately after the
introduction of QQE (May 2013) was 0%, one may conclude that “two years of QQE have brought us back to the
starting point.”
Result of “moving expectations”
Of course, it can probably be argued that inflation “expectations” have been affected. That is why the BOJ has
adopted the view that “inflation expectations appear to be rising on the whole from a somewhat longer-term
perspective.” However, in the “Comments on the Price Rise” section of the BOJ’s most recent “Opinion Survey
on the General Public's Views and Behavior” (March 2015), the share of those who chose the “rather
unfavorable” response reached 83.7%. This is a higher share than the 80.3% share of those choosing that
response two years ago in the March 2013 survey. Moreover, the Cabinet Office's “Economy Watchers Survey”
and other surveys clearly show an eruption of discontent with JPY depreciation and price increases,3 and there
are zero signs of the budding of an incipient virtuous cycle spurred by inflationary expectations. Essentially, it
appears that the attempt to increase prices has become disliked by the public.
3
Please refer to the March 12, 2015, edition of this article, entitled “Will there be an additional BOJ monetary easing? – The possibility cannot altogether
be ruled out.”
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How has the real economy changed?
Even if there has been no increase in the inflation rate of inflationary expectations, it would still be possible to
muster a positive appraisal of the QQE policy so long as it has had a positive effect on the real economy. In this
regard, measuring the real economy in terms of real GDP is the simplest approach and, looking at the seven
quarters from the April-June 2013 quarter to the October-December 2014 quarter, one finds that real GDP
growth QoQ averaged 0.0% – essentially, the economy has continued to be flat. A simple comparison of demand
components at the start and end of that time period shows that real GDP declined from JPY 528 trillion to JPY
526 trillion and that the key personal consumption expenditure item decreased from JPY 307 trillion to JPY 299
trillion. Private sector capital investment edged up from JPY 69 trillion to JPY 71 trillion, while exports increased
from JPY 9.8 trillion to JPY 11.9 trillion. In particular, it is the increasing robustness of exports that may, to a certain
extent, be recognized as reflecting a beneficial effect from JPY weakness (as mentioned above, this is not an
increase in the export volume index). However, given that this degree of growth has come at the cost of exposing
the financial markets to huge side effects, it is debatable whether it has been worth it.
Results of QQE? – Stock prices and employment/wages situation
So far, it may appear that QQE (as the core of Abenomics) is completely without positive aspects, but there are
two areas in which it has decisively produced improvements. One of these is stock prices, and the other is the
employment/wages situation. The stock price rise does not really require confirmatory statistics, but the Nikkei
stock price average rose from about JPY 12,300 in April 2013 to JPY 20,000 in April 2015 – an increase of over
60%. In November 2012, when the strong reflationary orientation of Abenomics was being discussed, Nikkei
average was approximately JPY 9,000, and it has more than doubled since then. There is no leeway for doubt
that the rise in stock prices is the greatest result of QQE, and other asset price changes (sharp JPY depreciation,
sharp drop in interest rates, rise in real estate prices) can be considered another conspicuous result of QQE. As
noted above, however, even with those asset price changes personal consumption expenditure on a real basis
has not risen (it has actually decreased), and there are no signs of the asset effect propelling improvement in
economic conditions. Of course, there are no economic entities facing difficulties stemming from high stock
prices, so it is good to see stock prices rising, but it would be misleading to overemphasize the associated
benefits.
Supply-demand regarding employment clearly becoming tight
The supply-demand situation regarding employment/wages has clearly become tight and, as recognized by BOJ
Governor Kuroda, Japan is moving close to a full employment situation (see graph below).4 Since, monetary
easing is being sustained despite the recognition of full employment, and since there are no signs of a move
toward monetary tightening, one would ordinarily expect the economy to face supply constraints (excess
demand). In fact, there are some signs of problematic personnel shortages in non-manufacturing industries
(restaurants, retailing, etc.) that may be considered symptoms of supply constraints. Furthermore, moves to shift
from the use non-regular employees to the use of regular employees are frequently been seen. The non-regular
employment ratio peaked late last year and has been declining, but even amid this situation the total number of
employed people is not declining. It seems that, rather than using non-regular employment as an adjustment
method, companies are dealing with supply constraints by beginning a shift toward the hiring of stable, regular
employees. In addition, the March BOJ Tankan survey indicates that companies of all sizes are encountering
labor shortages.
（％）
Japan's structual unemployment rate
One phenomenon that is clearly reflecting the
6.0
tight employment/wages situation is the
5.0
incidence of annual wage increases larger than
4.0
normal, and this was an unexpected trend for
3.0
the many observers (including the author of this
article) who are skeptical about the reflationary
2.0
policies. As can be seen from the current,
1.0
historically low levels of the real wage indicator,
0.0
however, price increases are eroding the value
-1.0
of nominal wage hikes, and this is a factor
70 71 73 74 76 78 79 81 82 84 86 87 89 90 92 93 95 97 98 00 01 03 05 06 08 09 11 12 14
preventing signs of personal consumption
Total unemployment rate（①）
Equilibrium of unemployment rate （②）
growth measured on a real basis. Of course,
Unemployment rate resulting from a labor demand shortfall （①-②）
the effects of the consumption tax rate hike
（Source）The Japan Institute of Labour Policy & Traning （JILP）
have diminished since April and, since the
44
According to Japan Institute for Labor Policy and Training (JILPT) data, the unemployment rate generated by insufficient demand is only 0.09% as of
last December.
Medium-term Forex Outlook
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Mizuho Bank Ltd.
impact of the crude oil price drop is projected to depress prices going forward, there is a high likelihood that
robust nominal pay hikes may lead to a clear trend of increase in real wages. At the BOJ monetary policy
meeting this week and on April 30, it is highly likely that the tightness of the employment/wages environment will
be cited as a reason for maintaining the status quo.
Wage and price increases dependent on labor productivity improvement
（Wage, yen）
Correlation of wage per hour and labour productivity per hour
The above sections of this article indicate that
2,400
the impact on the real economy from the
2,350
unprecedented monetary easing initiated two
2,300
years ago has largely been concentrated on
2,250
the employment/wages aspect of the
2,200
2,150
economy. Although it is intuitively apparent
2,100
that, rather than the effects of QQE, the
2,050
employment/wages situation has been
2,000
greatly influenced by government, labor, and
1,950
management actions exemplified by the
1,900
3,100
3,200
3,300
3,400
3,500
3,600
3,700
3,800
3,900
government’s demands for wage increases,
（Labour productivity, yen）
it is undeniable that QQE’s promotion of JPY
(Source) Cabinet Office, MIC, Ministry of Health, Labour& Welfare & INDB
(Note) Real labour productivity per hour =(nominal GDP÷total labour hours)×GDP deflator÷100
depreciation and stock price rises has also
played a role in providing companies with the
resources (profits) needed to respond to the wage hike demands.
If this year’s trend of relatively strong wage hikes is sustained, a permanent trend of improvement in income
would naturally have the potential to boost personal consumption going forward and prices can also be expected
to rise. (Although the target of boosting the inflation rate to 2% by March 31, 2016, seems unlikely to be attained.)
However, the problem relates to the question of whether those trends can be sustained. The precedence of
wage increases will pressure companies to realize subsequent productivity improvements, and there is some
basis for characterizing the wage increases seen so far are merely being government induced moves. The
incentives for corporate productivity improvement in a world where halting wage hikes is easily accepted are
clearly different from the productivity improvement incentives in a world where constant wage hikes (and
associated price increases) are considered natural. However, Japanese companies have not been paying
wages that are unreasonably low in comparison with productivity – one gets the strong impression that wages
have been set in line with productivity (see graph). In this regard, while there is some basis for the
abovementioned concept of “productivity improvements realized in response to preexisting cost (wage)
increases,” it is more likely that the causal relationship is better described as “productivity improvements have
been followed by cost (wage) increases.” If the latter description is true, then it is questionable how long a
government-controlled wage increase campaign can be sustained.
In any case, two years after the start of (the initial commitment to) QQE, it appears that the factors affecting the
fate of price increases are gradually moving away from the central bank’s discretion and becoming determined
by the private sector – price increase projections seem to be becoming wagers on the kind of productivity
improvement companies can achieve. The process going forward may not be quite as simple as “corporate
productivity rises enabling the realization of wage/price increases.” However, compared with the confused effects
of a crude oil price increase and currency depreciation, it would clearly seem that the corporate-productivity-rise
approach is the sounder and more-desirable route toward realizing price increases.
Medium-term Forex Outlook
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Mizuho Bank Ltd.
U.S. currency policies now and going forward – USD strength being tolerated for
the moment
The point of the U.S. Semiannual Report on International Economic and Exchange Rate
On April 9, the U.S. Department of the Treasury published the latest edition of its Semiannual Report on
International Economic and Exchange Rate Policies (hereafter, simply “the Report”). The points one can take
away from the Key Findings section at the start of the Report are (1) overall, a stance of tolerating USD strength
is discernible, and (2) there are strong calls for fiscal mobilization. Both are the same as in the October Report. It
cannot be said that the U.S. currency authorities’ stance has changed dramatically compared with last time. The
conclusion seems to be that the strength of USD since last year reflects the strength of the U.S. economy in
contrast to the weakness of other economies. There seems to be no feeling that USD has been unjustly forced to
appreciate as a result of the accommodative monetary policies adopted by the ECB and other central banks. In
this regard, considering that JPY fell sharply after the October 31 Halloween easing implemented by the BOJ
soon after the publication of the previous issue of this Report, and that EUR fell sharply following the ECB’s
implementation of quantitative easing (QE) on January 22 this year, one gets the impression that the Report’s
tone is extremely calm.
This time again, no country has been labeled a currency manipulator, and there seems nothing in the report that
could lead to a serious problem. It was, however, mentioned that “balanced approaches to macroeconomic
policy are particularly needed in large surplus countries, notably in Germany, China, Japan, and Korea.” Looking
at the section Analyses of Individual Economies, the most space has been devoted to China (as usual), followed
by Japan, the Euro zone, and South Korea in that order. However, the order in which a summary of the analyses
of individual economies has been introduced in the Key Findings section is first the Euro zone, followed by Japan,
China and then South Korea. Perhaps, rather than “more space devoted to a country = stronger awareness of a
problem,” it may be better to assume that the order in which the summaries are introduced reflect the priority
ranking in terms of which countries the Report wants to underscore. Be that as it may, it is hard to comprehend
why Japan has been mentioned as a country with a large surplus. As one can tell by reading the Key Findings
section, the amount of current account surplus and its ratio in terms of the GDP have been mentioned for all the
countries/regions mentioned above with the exception of Japan. In the case of Japan, the Report merely states
that weak domestic demand “is an ongoing concern.” As I will explain below, the remark’s intent seems to to be
to suggest that Japan should complement its weak domestic demand by mobilizing fiscal policy in addition to
monetary policy. Perhaps it should be read as implying that a policy that single-mindedly pursues weak JPY is
not appropriate.
The feeling that USD is “still not too strong” comes through clearly
First, with regard to (1) the stance of tolerating
（Mar 1973=100）
（Jan 1997=100）
USD/JPY rate （nominal・real） progression
140
130
USD strength, the section The Dollar in Foreign
125
Exchange Markets is usually useful. Having said
120
120
that, very little space is devoted to this section,
100
115
which mainly explains the extent to which USD
110
Dec 2014 :
80
Over 20yr average since Apr 2009
has appreciated since last year. The October
105
60
2014 issue of this Report said, “U.S. economic
100
95
growth is expected to exceed Euro zone and
40
90
Japanese growth by 1 to 2 percentage points
Mar 2015：
20
85
Over 20yr average since Apr 2009
through 2016, making U.S. assets relatively more
80
0
attractive for investors” – a clear indication of
93
95
97
99
01
03
05
07
09
11
13
15
Real effective dollar
tolerance regarding USD strength, but this time, a
20yr average （real effective）
similar description cannot be seen. When it
Nominal effective dollar （right axis）
comes to the overall tone of the Report, there is
20yr average （nominal effective, right axis）
no change in the stance of accepting the strength
（Source）FRB,、Broad base
of USD, but perhaps, from the perspective of the
currency authorities, the scope of further increase that can be permitted has decreased significantly. Having said
that, the section ends with the statement “The broad trade weighted dollar remains well below its peak in the
early 2000s,” so it seems the Report’s intent is to express that USD is still “not too strong.” As the chart on the
previous page shows, last month, the real effective USD rate finally rose above the (20-year) long-term average
for the first time since April 2009, so from forex rate levels, a completion of the monetary policy normalization
process seems to have already been factored in.
Medium-term Forex Outlook
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Mizuho Bank Ltd.
Analyses of Individual Economies – The assessment of the Japanese economy and JPY rates
As described above, the Analyses of Individual Economies, which forms the core of the report, devotes a lot of
space to Japan. The section begins by pointing out that “the fall in private spending after the tax hike was more
persistent than the government expected” and that “domestic demand in the fourth quarter of 2014 was about
1.5 percent below its level in the fourth quarter of 2013,” training the spotlight on the weakness of domestic
demand. It goes on to say, “Going forward, the government needs to pursue a balanced macroeconomic policy
approach to avoid excessive reliance on exports and support a recovery driven by domestic demand while
redoubling efforts to promote meaningful structural reforms necessary to raise long-term growth in Japan.” Taken
together, the remarks seem to imply that Japan should not simply supplement the insufficient portion of domestic
demand with foreign demand. There is a sense that Japan’s single-minded pursuit of JPY weakness through its
QQE policy is not seen in a very positive light. There is no overt criticism of the QQE policy – rather, it has at
times been appreciated, but clear disapproval of the country’s contractionary fiscal policies comes through, such
as in the remark: “With zero growth in real GDP in 2014, the contractionary effects of fiscal consolidation before
recovery has durably taken hold are concerning.” Moving on to forex rates, which are of the most relevance here,
no clear opinion has been expressed about the JPY rate level, but some amount of concern regarding its
excessive weakness is discernible in some places. Specifically the following passage:
In its last Article IV Consultation Report for Japan from July 2014, when the yen was at ¥102, the IMF
assessed the yen’s real effective exchange rate to be broadly consistent with the economy’s medium-term
fundamentals, while noting the very large uncertainty about its assessment given the major changes to
Japan’s economic policies and lags between exchange rate moves and the variables that influence the
IMF’s assessment. Since then, Japan’s trade weighted real exchange rate has depreciated 9 percent.
●
The Report does not go on to say what it thinks of this 9% depreciation, but given the opinion expressed above, it
could be that the Treasury Department is concerned about the discrepancy that has arisen compared with the
level “broadly consistent with the economy’s medium-term fundamentals.” Note that the section of the Report
dealing with Japan ends with the remark: “Agreement on the Trans-Pacific Partnership (TPP) would be an
important step to lead to internal reforms such as deregulation in areas including agriculture and medical services
that could support growth.” In light of the increasing tendency in discussions to link agreement on the TPP to U.S.
currency policies, this line may contain an important hint for Japan going forward.
The vexing interpretation that “the U.S. itself is the source of its currency’s (USD’s) strength”
As described above, so far as the recent issue of the Semiannual Report is concerned, there are no clear
indications that the U.S. Treasury Department is concerned about USD strength at the present time. As I
mentioned at the start, the conclusion seems to be that USD strength is simply a reflection of the relative strength
of the U.S. economy, and there seems no feeling that it is being unjustly buoyed up. If we consider that USD
strength is due, in large part, to actions taken in response to the FRB’s normalization process, the origins of the
USD strength can be found in U.S. macroeconomic policies, so there are limits to how far the accommodative
monetary policies of other nations can be denounced. The economies which get denounced could retort with, “If
you dislike USD strength so much, speak to the FRB about it,” so the U.S. Treasury Department is probably a bit
vexed at the situation. If one assumes that the Treasury Department’s stance is probably to quietly monitor the
situation until the start of rate hikes in an effort to preserve the FRB’s honor, the tone of the Report may show a
clear change from October onward, if rate hikes have begun by that time. Again, if we consider that the demands
from U.S. industry circles may become more shrill leading up to the presidential elections to be held next fiscal
year, U.S. currency policies at that time could conceivably become less tolerant of USD strength.
Medium-term Forex Outlook
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U.S. monetary policies now and going forward – From “when will it be
implemented” to “how many times can it be implemented”
The important question is not “when will it be implemented,” but rather “how many times can it be
implemented”
Regarding U.S. monetary policies, the phrase “can be patient” with regard to the monetary policy normalization
process was deleted from the official statement of the March FOMC meeting. With this, the focus of monetary
policy debates has finally shifted to rate hikes for the first time in ten years. However, the statement of the next
FOMC meeting (April 28-29) assessed current economic conditions as “economic growth slowed during the
winter months, in part reflecting transitory factors” – a clear downward revision. Notice the transition (below) in the
phrasing of this part of the official statements issued since the beginning of this year:
●January: economic activity has been expanding at a solid pace
●March: economic growth has moderated somewhat
●April: economic growth slowed during the winter months, in part reflecting transitory factors
The transition shows that things have recently been difficult for the FRB as the imminent start of rate hikes
coincides with a downgrading of the economic assessment. Of course, there is still the possibility of a rate hike in
June if the FRB falls prey to its own strong desire to normalize monetary policy by implementing a rate hike while
it still can, but it is extremely small, given the consistent message that a hike would depend on incoming
economic data. I, therefore, see no reason to change my assumption in this report that the timing of a hike may
be June at the earliest, but December in the natural course of things. However, the important thing when
considering the forex outlook for the next one year is not the timing of rate hikes. At this point, it can be said that
the very fact that the FRB has begun a dialog about normalization is a reason to normalize, so the question of
the timing aside, the consensus in the market is that at a rate hike will be implemented at least once. Even
though the question of “when it will be implemented” is drawing attention at the present time before the rate hike,
once rate hikes have begun, the debate will shift to “how many times can it be implemented.” With regard to this
question, there is the opinion that, if things progress smoothly, rate hikes will continue for a period of about three
years at the pace of once every quarter, but there is also some concern that the rate hikes could end after the first
time. Given that, in the present climate, the timing of the first rate hike is at the mercy of the incoming economic
data, even if the process does not end with the first hike, the majority of market participants may be imagining a
scenario closer to the latter than the former. If that were, indeed, to be the case, one may even start hearing
about a QE4.
If one considers that the forex outlooks for the key currencies have always been prepared based on the gap
between the monetary policies of the U.S. and the country in question, “how many more times can the interest
rate be hiked” is an important question. In particular, if the U.S. monetary policy normalization process is
interrupted, it is very likely that EUR rate trends, which have been formed on the basis of speculative short
positions that provide for factors that could result in the appreciation of key currencies, could be forced to undergo
a reversal.
Historically, a rate hike ≈ USD sale
（Yen）
（％）
Federal funds rate & USD/JPY rate
Given concerns of USD strength even before the
174
9.0
start of rate hikes, USD appreciation could
USD/JPY rate
8.0
accelerate once rate hikes have begun, thereby
154
Federal funds rate （right axis）
7.0
derailing the normalization process – there is
6.0
some logic to this line of thinking. In formulating
134
5.0
forex outlooks, the easiest scenario to understand
4.0
114
would be if USD were to continue appreciating as
3.0
rate hikes progress. This would make it easy to
2.0
94
formulate forecasts too. However, reality is more
1.0
complex. As I have said many times in past issues
74
0.0
of this report, historically, there has been the
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
anomaly of USD sale accelerating immediately
（Source） Bloomberg
following the start of rate hikes (see exhibit on
previous page). Given that the dollar index has been battling at a high level since the start of April, the
aforementioned scenario is quite possible.
Considering this anomaly of “rate hike ≈ USD sale,” plus concerns of a U.S. economic slowdown immediately
following a rate hike, accompanied by a narrowing of the gap between U.S. and Japanese monetary policies,
even if the current weak JPY/strong USD phase holds out until the end of the year against the BOJ’s additional
Medium-term Forex Outlook
12
Mizuho Bank Ltd.
monetary easing and other factors, it is very likely that, from next year onward, a storyline different from that of the
past three years will be called for. Of course, if the BOJ were to be drawn in by the government’s currency
policies and make a complete about-turn, thereby switching to a stance of distancing itself clearly from additional
monetary easing, that “different” storyline may be brought forward, and my outlook for JPY rates this year may
have to be revised to limit the scope of its further depreciation.
“Fundamental scenario-related risks – Not discounting the 2016 JPY weakness
scenario”
Risk factors becoming increasingly relevant
What could come in the way of JPY weakness/USD strength
As previously, because the fundamental
Risk factors
Remarks
supply-demand environment continues to be
Historically, USD has tended to drop sharply just
1 Historical anomaly
characterized by net JPY selling, this article’s
following a FF rate increase
FRB begins to be concerned about USD strength
main scenario, at least for the current fiscal U.S. 2 Deterring action by the U.S.
and drop in crude oil prices
year, is for JPY weakness/USD strength. As
Rate hikes end after first round due to the negative
3 U.S. economy's setback
explained above, however, because risk
impact on housing market, etc.
Continuous improvement in terms of trade and
factors are clearly beginning to become more
Improvement in Japan's terms of
current account against backdrop of crude oil
4
prominent, it will be important to continuously
trade/current account
Japan
price drop?
monitor the items in the chart on the right.
JPY weakness as a tenuous currency policy –
5 Deterring action by Japan
While these factors were not so significant at
response if oil prices were to rise?
Diverse geopolitical risks and other unpredictable
the end of last year, at this point, particularly
Other 6 Other
events generally lead to windbacks of JPY short
items (2), (4), and (5) are attracting a growing
positions
amount of close examination. For example,
Source: Compi led by Ka ra ka ma
CEA (Council of Economic Advisers) Chairman Jason Furman’s March 10 “the strong dollar is undoubtedly a
headwind for the U.S. economy” statement was considered a market-moving factor that spurred a sharp drop in
USD. As noted above, however, the latest edition of the U.S. Semiannual Report on International Economic and
Exchange Rate Policies (released in April) seems, if anything, to be expressing acceptance of USD appreciation,
so it still cannot be said that risk factor (2) has become a reality. Despite this, as already explained, there is a
possibility that USD appreciation can be accepted from the perspective of currency policies based on
consideration of the fact that monetary policies are currently in the process of being normalized, so there is a
possibility that this accepting stance may be modified if the next edition of the report released this October is
subsequent to an interest rate hike in September. (In addition, as explained below, there is a possibility that there
will be greater consciousness of currency policy changes during the period immediately before and after the U.S.
presidential elections next year.) Objectively viewing the situation, it appears that the amount of noisy speculation
regarding USD strength is undoubtedly increasing, and this can be considered to reflect rising risks associated
with the weak-JPY scenario.
（Year 1985
Real effective JPY rate & terms of trades progression
The problem relates to items (4) and (5). Since average=100）
200
risk factor (4) has already been discussed I will
Strong
Better
↑
↑
not go into details here but, as reflected in 180
Excessively strong JPY is almost disolved by
JPY
Terms of trade
Abenomics in comparison with terms of trades
Japan’s restoration of its trade surplus in March,
↓
↓
Weak
there are certainly signs of changes beginning 160 Worse
to take place in the JPY-related supply-demand 140
environment. At the current stage, however, the 120
changes appear to be causing only a “decrease
in JPY-selling pressure” and to have not yet 100
Terms of trade
spurred a change to a degree that would cause
80
Real effective JPY rate
people to refer to “rising JPY-buying pressure.”
60
People have tended to note that Japan’s trade
85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15
（Source）Bank of Japan
balance through March has benefited from a
(Note) export price/import price JPY dominated base
sharp drop in imports stemming from the crude
oil price plunge, and there is a possibility that the pace of improvement in the trade balance will slacken during
the next few months. However, the crude oil price plunge has halted the trend of decrease in the average level of
JPY exchange rates theoretically suggested by the terms of trade (export prices ÷ import prices), and one should
not overlook the fact that that average level has begun rising recently. This article has been pointing out that the
sharp JPY depreciation seen since the advent of Abenomics has led to a convergence between real JPY
exchange rates and the rates suggested by the terms of trade – the divergence between real effective JPY
exchange rates and the terms of trade has been considerably diminished, and there has recently been clear
movement in the terms of trade that is promoting the elimination of that divergence (see chart). There is naturally
Medium-term Forex Outlook
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Mizuho Bank Ltd.
a possibility that a renewed rise in crude oil prices could cause movement in the terms of trade to flatten out or
decline but, at least so long as the terms of trade are maintained roughly at the current post-crude-oil-priceplunge level, it will be important to note that such a situation will suggest a halting of the effects of a theoretical
basis for JPY weakness.
More worrisome is risk factor (5). Since last year, this article has felt concern about the possibility that the
government’s currency policy stance of seeking to avoid JPY weakness might have an impact on the BOJ’s
monetary policy stance of seeking to attain the “2% in two years” inflation target. Since the start of 2015, this risk
appears to have become half-way realized, and it can be said that the government has “thrown in the towel” with
respect to the BOJ’s QQE policy. The problem relates to whether or not the BOJ will pick up this towel and
completely restrain its desire for easing. As I have reiterated each month, this article’s “JPY 130 within this year”
outlook is conditional on the BOJ’s undertaking additional easing in line with its “Halloween Logic.” As explained
above regarding this point, this autumn will be the showdown period for the BOJ, and it cannot yet be said that
the budding results of easing have been for naught.
In the case that risk (2) and risk (5) both become realized, then the currency policy interests of Japan and the U.S.
will become aligned in a way that is extremely rare from a historical perspective. This can be said to the worst
scenario with respect to the JPY weakness/USD strength outlook.
Not completely discounting the 2016 JPY weakness scenario
As last month’s edition of this article pointed out, while the JPY scenario is expected for fiscal 2015, it appears
that another scenario will be needed for next fiscal year (see chart). Although the supply-demand environment
this fiscal year is expected to be characterized by net JPY selling stemming largely from accelerating growth in
outward securities investment, the changes in fund flows associated with changes in the portfolio management
policies of the Government Pension Investment Fund (GPIF) and other pension funds are expected to become
less significant by sometime this autumn, and it is assumed that subsequent outflows will gradually peter out.
Given the effects of these trends along with improvement in Japan’s trade balance, it will probably become
difficult to justify additional JPY depreciation next fiscal year based on supply-demand factors. (However, the
assumption of improvement in the trade balance is entirely dependent on the assumption that the level of crude
oil prices will be generally flat.)
General image of fiscal 2016 outlook
Item
U.S.
(1) Monetary policy
(2) Currency policy
Japan
(3) Monetary policy
(4) Currency policy
(5) JPY supply/demand
Other
(6) Other disrupting factors
Comment
Shift from “when will they” to “how many times
can they”
Limit to acceptance of USD strength? Focus on
period before/after presidential elections
Realistically impossible to rule out given
prospective April 2017 consumption tax rate hike
Upper House elections in July 2016. Difficult to
put up with real wage decline?
Outward securities investment convergence and
trade balance improvement
Greece-related chaos, ECB exit strategy, crude oil
price plunge, etc.
Directionality
JPY strength/USD weakness
JPY strength/USD weakness
JPY weakness/USD strength
JPY strength/USD weakness
JPY strength/USD weakness
Depending on the situation
Moreover, regarding the outlook for USD/JPY along with all other USD-related currency pairs, it is generally
understood that the FRB’s policy normalization will cause a “disparity between the monetary policies of the U.S.
and other countries,” and fiscal 2016 will be the year when the robustness of that disparity’s effects will be tested.
Since even the amount of USD appreciation occurring prior to an initial interest rate hike (half of it spurred by the
U.S. itself) has led to difficulties, many people are frankly inclined to doubt whether a sequence of interest rate
hikes would be feasible. As already explained, when considering the forex outlook for the year ahead, the most
important factor is not the timing of the interest rate hike. Setting aside the issue of the timing, the market
consensus is that “they will definitely hike rates once.” The “when will they do it” issue is in the spotlight at this
point, prior to an initial rate hike. After the initial hike, however, the focus will shift to the “how many more hikes are
feasible” question. As mentioned above, many people are inclined to be bearish on this issue. Moreover, while
the U.S. currency policies appear to be accepting USD strength at this point, we must take into account what U.S.
industries are likely to be saying before and after the presidential elections and give due consideration to the risk
that there will be a change to that posture of acceptance. Besides the changes in the supply-demand
environment during fiscal 2016, regarding U.S. monetary policies, since we cannot have great confidence in our
ability to predict the answer to the “how many more hikes are feasible” question, we should probably maintain a
general image that USD/JPY is liable to have a increasingly heavy upside potential.
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EUR Outlook – Continued outlook for short-term weakness and
medium/long-term strength
ECB Monetary Policies Now and Going Forward – Emphasizing credit function
improvement
Nothing new besides the intruder
The April 15 ECB Governing Council decided to keep the policy interest rate (interest rate on main refinancing
operations (MROs)) at 0.05%, the upper limit (the interest rate on the marginal lending facility) at 0.30%, and the
lower limit (interest rate on the deposit facility) rate on the deposit facility at -0.20%. As a result, the interest rate
corridor (the difference between the upper limit and the lower limit) was maintained at 0.50 percentage point.
Reflecting the fact that the it was the first meeting following the March 5 meeting, which presented revised ECB
staff macroeconomic projections along with details of the expanded Asset Purchase Programme (APP), this
meeting did not offer much new (excepting the disruption at the start of the press conference, when a female
protester jumped up on the stage and criticized President Draghi5).
At the press conference, President Draghi
(％ point)
Bank lending inclination & demand for loans in Euro zone
80
mainly limited himself to pointing out recent
Increase
Tightening
improvement
in
the
Euro
zone’s
60
↑
↑
economic/financial situations while praising
Demand for
Lending inclination
40
the effects of the ECB’s existing policies.
loans
↓
↓
Easing
Particularly regarding improvement in credit
20
Decrease
trends, Draghi referred to ongoing changes
0
such as those reflected in the results of the
April 2015 bank lending survey (see graph),
-20
and he appeared to be pleased with what he
-40
was reporting. In his introductory statement,
Credit standards
Demand for loans
he said – “the April 2015 bank lending survey
-60
07
08
09
10
11
12
13
14
15
confirms that improvements in lending
(Source)
Datastream
conditions support a further recovery in loan
growth, in particular for firms.” As the graph shows, however, growth in demand for loans decelerated from the
level reported by the previous survey (in January), so the lending situation cannot necessarily be characterized
as firm. Draghi also emphasized the “full implementation” concept several times, saying – “Looking ahead, our
focus will be on the full implementation of our monetary policy measures.” – and – “The full implementation of all
our monetary policy measures will provide the necessary support to the Euro zone recovery and bring inflation
rates towards levels below, but close to, 2% in the medium term.”
Categorical denial of tapering and deposit facility rate reduction
The emphasizing of “full implementation” may reflect President Draghi’s desire to respond to the tapering-related
concerns that some people have conceived. As expected before the meeting, there was a question about the
tapering of QE. In response, Draghi said – “I’m quite surprised, frankly, by the attention that a possible early exit
of the programme receives, when we’ve been in this programme only a month ” – and he thereby discounted
the possibility of tapering. However, the reason this issue has attracted attention is that several high-level ECB
officials have hinted at this possibility. Although there was no in-depth, concrete discussion of tapering this time, it
is undeniable that there are concerns within the Governing Council regarding the sustainability of QE as well as
regarding the various problems associated with QE.
The tapering issue is stemming from a consciousness of the potential problem stemming from “concerns about
an exhaustion of assets within the ECB QE purchasing scope,” and Draghi briskly disposed of those concerns by
saying – “The worries about potential scarcity of government bonds, sovereign bonds, to be bought under our
purchase programme, are just a little exaggerated. We don’t see problems.” However, most interest rates in the
Euro zone are at historically low levels, and the interest rates on German government bonds, which account for
the largest share of bonds in the area, are becoming chronically set at -0.20% or lower for issues with maturities
up to four years. Regarding the potential drying up of assets eligible for purchase under the current QE scheme,
which allows for purchases of assets with interest rates no lower than -0.20%, a reporter asked the question –
“would you ever consider [further] lowering the deposit rate” – and Draghi explicitly replied – “The answer is no.”
5
The ECB’s March 18 inauguration ceremony for its new headquarters building was accompanied by an anti-austerity demonstration, and it appears
that the incident at the last Governing Council Meeting stemmed from the previous demonstration. The ECB’s press release, “Statement on incident at
ECB press conference,” explained that the woman presented a falsified credential when she went through an identity check and emphasized that
President Draghi was not harmed.
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Despite that, however, since Draghi also stated during the press conference that – “our programme is flexible
enough in any event to be adjusted if circumstances were to change.” – there are fully sufficient grounds for
anticipating that there may be some fine-tuning adjustments to the scheme going forward.
Simple base money volume correlation?
Euro zone M3 variation factor （ monthly, seasonally adjusted, YoY）
Without waiting for the quarterly bank lending （Bill euro）
2,000
survey results, one can discern improvement in
Credit to private sector
Credit to governments
Net external assets
Others
the credit environment from monthly reports on 1,500
Long term financial debts
M3
the money supply (M3). The Euro zone’s latest
(at the time this article was written) M3 report, 1,000
for February, showed that M3 was up 4.0% YoY,
500
the most rapid growth rate seen since April
2009. The results of analyzing the factors
0
contributing to the rapid M3 growth are shown
-500
in the graph on the right. The biggest factor is
(1) growth in net external assets, followed by (2) -1,000
growth in credit to governments and (3) a
2008
2009
2010
2011
2012
2013
2014
2015
smaller margin of decrease in credit to the （Source）ECB
private sector. The growth in net external assets （Note） Long term financial debts: M3's deduction such as deposit （more deposit→ reduction M3）
reflects the earning of foreign-currency by means of the non-financial sector’s exports etc. Via transactions with
financial sector and other means, the net external asset factor adds to the money supply. This is logically
consistent with the Euro zone’s continued accumulation of huge trade surpluses. Regarding the growth in credit
to governments, this probably should simply be considered to reflect the Euro zone’s getting over the hump of
the anti-austerity mood 6 . (Given the nature of the savings-investment (IS) balance, government-sector
investment expansion can lead to private-sector savings expansion. Savings expansion leads to money supply
growth.)
While there is still no growth in the key area of credit to the private sector, the margin of decline has been sharply
shrinking recently, and it will be worth watching closely going forward to see if credit to the private sector
becomes transformed into a supporting factor. If the Euro zone real economy recovers in line with the ECB
forecast, then one can expect continued robust M3 growth led by credit to the private sector, and there should be
a rise in the Euro zone’s Harmonized Index of Consumer Prices (HICP) in line with the ECB’s ultimate objective.
Compared with the current situation of M3 expansion led by credit to governments and net external assets, it is
not difficult to imagine that M3 expansion led by credit to the private sector should make a relatively greater
contribution to an increase in HICP. Going forward, it will be worth monitoring and analyzing the question of
whether this kind of simple money volume relationship can be established amid the Euro zone’s current
economic/financial situation.
Continued EUR outlook for short-term weakness and medium/long-term strength
The ECB’s monetary policies seem likely to continue taking the easing route and, given the unchanged Greece
situation described below, it appears inevitable that EUR will be soft from mid-year through the autumn. As this
article has stubbornly argued, however, to the extent that one considers the fundamentals related to the supplydemand and price situations, the current EUR weakness is something that should be described as “epic
speculation” and its sustainability is questionable. Since April, for example, there has been an accumulation of
speculative EUR selling in IMM currency futures transactions and other arenas, but the prevailing market
exchange rates have not declined much. (In fact, they increased toward the end of the month.) One reason for
this that simply cannot be disregarded is the existence of the Euro zone’s current account surpluses. The Euro
zone’s current account surpluses have already greatly exceeded the size of Japan’s previous surpluses, and
they are associated with real demand flows leading to EUR buying that are quite large. During the forecast period,
one should probably continue watching out for the possibility that a perception of a lack of market moving factors
at such times as immediately following the FRB’s first rate hike will cause a rolling back of speculative positions
along with a sharp surge in EUR/USD. Memories of Japan’s experience during the period from 2005 through the
summer of 2007 – when JPY depreciated amid current account growth and a lack of price increases, followed by
a sharp appreciation in the summer of 2007 – should be kept in mind when considering the EUR outlook.
6
Please refer to the February 17, 2015 edition of Mizuho Market Topic entitled “Euro Area GDP and the EC Winter Economic Forecast.”
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Supplementary Discussion: The Greek Problem, Now and Going Forward – Will
for Solvency Improvement?”
Chronological overview of the Greek situation
The Greek situation has been attracting detailed analyses since April and I have received a growing number of
related inquiries. There has been particularly strong interest regarding two points – “What is the gist of the
February 20 agreement?” and “What are the key dates?” Since the twists and turns of the Greek situation are
extremely confusing, I would like to present a simple overview of the situation’s development since late February.
Regarding the first of the above questions, the concise answer is “the February 20 agreement is simply an
extension and does not call for additional funding.” The confusion that has occurred from the time of the
agreement to this point (April) was to a certain extent anticipated. Regarding the latter question, many people
tend to focus on the May 12 IMF loan repayment (EUR750 million) date and, since there will be a Euro zone
finance ministers meeting (Eurogroup) the previous day, it is possible that May 11 will be the key date.
The February 20 agreement is simply an extension
Regarding the first question, the February 20 agreement is simply an “extension” of existing programs, and the
question of whether to permit any “funding” implementation within the programs was to be assessed and decided
by the Troika subsequently. The result of the assessment was a decision not to provide additional funding, and
the turmoil surrounding the situation has become still more profound as of April. Moreover, it was soon agreed
that bridging funding would be “limited to the four month period through the end of June,” and this would appear
to reflect an assessment that the Greek government could not operate without the provision of funding. Actually,
however, the funding has remained frozen for two months. More specifically, bridging funding amounting to
EUR7.2 billion has been suspended since last year and, given the fact that the Troika has set the funding amount
to match the amount required, one frankly wonders why there has not been a drastic problem during the period
of suspension. In this regard, there have been many reports that Greece has somehow been able to make it
through the emergency situation by such measures as those to delay salary payments to government
employees and draw down pension funds. However, as described below, since there are reports beginning to
emerge of IOUs being issued in lieu of government employee salaries, there is a high likelihood that the country
is getting very close to the brink of disaster. While watching the European debt problem develop since 2009, the
issue that seems most difficult is the fundamental issue of determining how much funds Greece actually has in its
treasury and how much that amount exceeds or falls short of the country’s requirements. Since even the Troika,
which has endeavored to officially assess the situation, has not been able to establish a firm grasp of the situation,
one must naturally recognize that there are limits to the ability of outsiders to analyze the situation. It has also
been reported that, on the occasion of the February 20 agreement, the German authorities had referred to the
Greek request for an extension of support as a “Trojan horse,” and it must be said that the request is actually
functioning as such. Ultimately, the disbursement of bridging loans in installments was approved, but rather than
making a fresh “rehabilitated” start upon being retained in the area, Greece has further increased the frequency
of its troublesome statements and actions. The support extension is in fact becoming a “Trojan horse.”
IOUs are a milestone on the path to a Greek exit
I will now return to the task of overviewing the current situation. Following the February 20 Eurogroup agreement,
it was in March that there appeared to be a slight temporary improvement in the Greek situation, but the problem
began capturing renewed attention soon after the start of April. The trigger was an IMF Loan Repayment
scheduled for April 9. Specifically, on April 1, Greek Interior Minister Nikos Voutsis stated regarding the repayment
of the EUR450 million loan that the country was being forced to choose between repaying the loan or paying
salaries and pensions, and he hinted that he would choose the latter. This immediately heightened anxiety about
Greece’s situation. On April 9, Greece repaid the EUR450 million loan to the IMF on schedule, but, the liquidity
problem stemming from the non-disbursal of bridging funding discussed in the February 20 Eurogroup
agreement remained unsolved.
One key factor that has further heightened fears of a Greek exit from the Euro zone through to the present
appears to be an article entitled “Greece prepares for debt default if talks with creditors fail” that appeared in the
United Kingdom-based Financial Times on April 13. That article presented the idea that Greece is preparing to
default on its debt and quoted a government official as saying – “We have come to the end of the road . . . If the
Europeans won’t release bailout cash, there is no alternative [to a default].” That triggered the often seen
progression of “default fears → Greek exit fears → EUR selling.”
Soon afterward, reform proposals were discussed at an April 15 meeting of vice-minister-class officials prior to
the Eurogroup meeting (April 24) but, as has already been reported, the April 24 Eurogroup meeting ended in
discord. After the meeting, Eurogroup President Jeroen Dijsselbloem stated that – “comprehensive and detailed
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list of agreed reforms is needed a comprehensive deal is necessary before any disbursements can take place.
We are all aware that time is running out.” – and yet the same kind of statements were being heard just two
months previously. Since the start of April, the number of disturbing Greece-related reports has clearly been
increasing. On April 18, it was reported that there was a proposal to shift to the payment of Greek government
employee salaries in the form of IOUs, because the ECB’s extension of Emergency Liquidity Assistance (ELA;
considered the key to Greece’s remaining in the Euro zone) would be discontinued in the case of a Greek default
(Reuters, April 18). While the source and authenticity of this report is questionable, if virtual currencies (including
IOUs) were to begin circulating in Greece as a method of replacing the country’s official currency, then it could
certainly be said to be an important milestone on the path toward a Greek exit. If Greece really wants to remain in
the Euro zone, then they are showing extremely poor skills in rumor management.
Moreover, in an interview that appeared in the April 24 edition of the French weekly magazine, Philosophie,
Greece's Finance Minister Yanis Varoufakis was quoted as saying – “We cannot bluff anymore. When I say that
we'll end up leaving the euro, if we have to accept more unsustainable austerity, this is no bluff” (Reuters, April 23;
the interview itself was conducted at the end of March).
To the extent discernible based on this series of situations, it appears that Greece has diverted its attention from
considering the feasibility of fiscal reconstruction measures and has begun seriously considering the possibility of
leaving the Euro zone. When rumors began circulating about Greece’s government having insufficient funds to
operate after April 9, it was reported that Greek representative in a teleconference of Euro zone deputy finance
ministers said delaying new loans until a deal with creditors could be reached was unrealistic, and that reforms
should not be a “post mortem” for the country (Reuters, April 3). Essentially, it seems that the representative was
suggesting that if Greece were to accept reforms sufficient to satisfy the Troika, the country would be a “corpse
(default ≈ exit from Euro zone?), and this appears to indicate that Greece is strongly averse to undertaking
aggressive fiscal reform measures. It has been said from the beginning that the Greece problem is not one of
“liquidity” but one of “solvency,” and it can be said that it is now becoming impossible to continue keeping the
focus away from the solvency problem.
May 11 a key date – Japanese should keep aware despite holidays
Many voices are saying that May 11 will be a key date. In May, Greece is scheduled to redeem EUR1.4 billion of
short-term bills on both the 8th and 15th, but it is expected that these bills can be rolled over by domestic banks.
The problem is the May 12 IMF loan repayment (EUR750 million). Since the amount is small, there is a
possibility that Greece can surmount this challenge, as it has previous challenges, by reneging on a portion of its
domestic payment commitments, but if the repayment is delayed, Greece would be in default. Given this, Greece
is extremely eager to get its hands on the suspended EUR 7.2 of bridging funding, and that is why Greece told
the Eurogroup on April 24 that it wanted the funding to be disbursed even if it had to be in installments (although
the request was denied). If Greece does not seem likely to be capable of even making the IMF loan repayment
of EUR750 million on May 12, then it must make sure to present a convincing reform plan to the Eurogroup
meeting on the previous day so as to obtain the disbursement of the bridging funding. Given this situation, it
seems that May 11 will be the key date, and although Japanese market participants may be distracted by the
protracted Golden Week holiday period, they should do their utmost to keep abreast of related developments.
Greek exit scenario beginning with default
In the case that Greece manages to handle the May 11 repayment, it is likely to be positively reported in the
media reports and foster a sense of relief on the parts of market participants reading those reports. However, to
the extent that the country does not obtain the EUR 7.2 billion, it will suffer from a chronically empty treasury and
an associated smoldering concern regarding the possibility of default. Greece’s current situation of making
delinquent payments domestically is merely fostering abstract concerns and anxieties, but a delinquency in the
payment of external obligations would immediately make default a concrete reality.
As this article has stubbornly argued, it is the ECB’s ELA program that is supporting Greece’s financial system,
but it would be difficult to logically justify sustaining ELA support for Greek domestic banks holding large volumes
of government bonds issued by a country that is in default. A series of questions about the sustenance of ELA
support for Greek banks were posed at the March 5 and April 15 ECB Governing Council Meeting press
conferences, and ECB President Draghi has answered the questions along the lines of his March 5 response –
“ELA can be given to solvent banks with adequate collateral. The Greek banks at the present time are solvent.”
In the case of a Greek default, an “ELA discontinuation → Drying up of EUR within Greece → Greek exit”
scenario would seem inevitable.
In addition, the Greek domestic banks deprived of ELA support would go bankrupt. That situation would test the
capabilities of the ECB, which has been responsible for bank oversight since 2014, but it is possible that the
process of injecting funds into bankrupt banks might proceed smoothly. The need to make policy judgments and
decisions associated with the burden of funding the injections would definitely foment internal strife within the
ECB, as has been seen in the past. There probably would be a high likelihood that, even after the capital
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injections, there would be renewed problems regarding Greece’s posture with respect to fiscal reconstruction.
Indubitable need for a new framework from July
The above sections of this article present a story of how events associated with the EUR 7.2 billion bridge
funding may play out during the period through the end of June. From July, there will be a need to create a new
financial support framework (as saving Greece is not so easy that it can be done with a mere EUR 7.2 billion).
Greece will soon face this year’s largest government bond redemption challenge (EUR 7.64 billion, Bloomberg)
in July, and it is clear that it will not be able to surmount that challenge without additional support. However,
assuming that there is no change to Greece’s current attitude, it appears highly unlikely that agreement will be
reached on a new support framework.
Given this outlook, the quagmire of factors that have created the problem, and the dire scenarios likely to occur
going forward, it should be apparent that everything will depend on whether or not Greece will earnestly strive to
improve its solvency (or to progress with fiscal reconstruction). In this regard, since it would be difficult to expect
that the current government (which was voted into power based on the perception that it would not earnestly
strive to improve Greece’s solvency) to compromise on this issue, and since the government could not be
expected to sustain its coalition if it were to compromise, one can anticipate a flow of events leading to the
dissolution of the government and the holding of general elections. From late spring through summer, it will be
continue to be important to closely monitor the Greek situation and its effect on the forex market.
Daisuke Karakama
Chief Market Economist
Forex Division
Mizuho Bank, Ltd.
Tel: +81-3-3242-7065
[email protected]
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