As the dust settles on Kuroda’s FX comments, we reiterate our Blueprint view that
USD/JPY should gradually trade up to 128 over the course of Q3.First, Japanese institutional investors continue to buy foreign assets, and not only
on dips. Lifers in particular have ramped up purchases with limited sensitivity to
the exchange rate. We think pensions, albeit more sensitive, have lifted their
trailing dip-buying level closer to ¥122. Short-term risks to Japanese outflows are
skewed to the topside, as a resolution of the Greek crisis may trigger the
unwinding of USD shorts held by many Japanese investors to hedge against a
global risk-off.Second, the trade surplus posted in March—the first in four years—proved shortlived,
as the trade balance has shifted back into deficit. We expect recent deficits
of ¥200bn to narrow only slowly. Even if exports were to rise faster than expected,
this would be contingent on a weaker exchange rate. We estimate the reverse and
potentially supportive FX effect of the reversal in the current account to kick in only
in 2016, given the historical lag in this relationship of more than a year.Although speculative short positions in JPY remain heavier than before the recent
move up to ¥125, a fresh widening of the rate differential should help break that
level. This is likely to be driven by US monetary policy expectations, but the
Japanese leg could also help. Our baseline is that inflation well below the 2%
target will induce the BoJ to maintain QQE at the current rate well beyond 2015.
Our Japan economists see downside risks to tomorrow’s May CPI prints, even
when allowing for the effect of last year’s VAT hike dropping out. Indeed, as we
argued in the Blueprint, policy risks are likely.(DB)
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