License to Print – Japan evades G20 criticism
As widely anticipated, there’s little in the way of nourishment to be taken away from the G20 statement released over the weekend, with the world’s largest economies simply reiterating their commitment to refrain from using policy to devalue respective currencies. “We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes,” the statement noted.
Notably, it also bought the ‘fair-value’ element into the equation, adding “We reiterate our commitments to move more rapidly toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals, and avoid persistent exchange rate misalignments, and in this regard, work more closely with one another so we can grow together.”
With some of the world’s largest economies indulging in a veritable smorgasbord of policy stimulus in the form of quantitative easing or similar, it’s hardly the time to target one particular nation seemingly guilty of the very same thing which has led to the deterioration of the world’s ‘reserve’ currency – the US dollar. Nonetheless, one can never really prove with certainty a country such as Japan is using stimulus as a direct means of currency devaluation, however, it is abundantly clear currency weakness is a much welcomed side-effect.
Yen bears vindicated
Yen weakness after the release is perhaps the best indication of how the G20 draft statement was received across markets. In short, the status quo has been maintained – Japan has a license to continuing printing under the guise of economic stimuli.
After looking vulnerable to further downside earlier in the session, the Yen resumed weakening with the USD-JPY rate climbing to highs of Y93.85. Similar moves were noted across the board with the Yen finish lower against all of the majors.
With the G20 risk now off the table and Yen bears suitably vindicated, it’s now a question of how much is enough? Has the market already priced-in Prime Minister Shinzo Abe’s grand effort engineered to bring the Japanese economy truly back from the “lost decade/s”?
Apart from natural periods of consolidation, the case to expect further weakness remains the most convincing. While the risks are clearly present, markets remain firmly focused on how Bank of Japan Governor Masaaki Shirakawa’s departure in April will change the bank’s current stimulus plans. It’s expected a pro-stimulus ally of Abe’s will be given the top job, in turn increasing the likelihood of new or existing stimulus plans being launched sooner than anticipated.
For all its perceived safe-haven credentials, dig a little deeper and you will find a currency that has been severely disjointed from its fundamental worth. With a debt to GDP ratio of over 200 percent of which is funded by an ageing population, it could be argued the markets willingness to thrash the Yen is merely an excuse to price in Japan’s rather uninspiring fundamentals.
Among advanced and emerging economies, Japan is the undisputed champion of the debt race, with current estimates showing the public debt at an alarming 235 percent of GDP and projected to rise to 250 percent by 2017.
An alternative view…
On the flip side, 3-months of one-way traffic can be extremely dangerous should the underlying catalysts change to a great degree. Ironically, we see the greatest risk coming from the Japanese Government itself. Although the have taken significant steps to encourage currency weakness through policy, there may be a point where they judge the Yen is at a desired level. If and when this happens is anyone’s guess (100 Yen to the dollar perhaps), but it wouldn’t be surprising to see the government begin to talk the currency higher when they judge an appropriate level of exchange has been overshot.
We saw this recently with Japan’s Finance Minister Taro Aso stating the Yen has weakened “more than then we [the Government] intended”. Traders quickly squared and reversed short-term bets for a brief period of time. Although we consider Aso’s comments more of an attempt to deflect attention before the G-20 meeting, they demonstrate how effective a little jawboning can be. The use of the word “intended” may reveal two important things, firstly the Government has a desired exchange rate in mind, secondly (and more importantly in the context of the latest G-20 meeting), the Government has sought to devalue their currency through policy.
A$ fails to launch; RBA minutes in frame
The Aussie dollar notched up its 5th consecutive week of losses, finishing a moderate 0.13 percent lower from its previous weekly close. Negative to neutral risk trends kept demand for high beta currencies to a minimum on Friday with the Kiwi leading the commodity bloc lower after a solid week of buying. In early trade the local unit is buying just shy of 103 US cents in extremely light liquidity, but we anticipate moderate support will carry price action back above the figure in the domestic session.
While we expect the usual gyrations from global risk barometers will ultimately decided the Aussie’s trajectory over the week, Tuesday’s RBA minutes may once again serve as a reminder of the bank’s willingness to ease further.
The meeting saw the RBA hold the official cash rate steady at 3-percent, while flagging the potential for policy easing should downside risks materialise. Although Governor Stevens acknowledged the more positive themes (particularly improvements from a global perspective) the statement left the door for further policy easing well and truly open. “The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand.”
The statement also expressed the need to wait until prior cuts to the cash rate have penetrated the economy, noting “the full impact of this will still take further time to become apparent”. One again, the high exchange rate received only a partial mention noting the “exchange rate remains higher than might have been expected”.
The usual adjectives were littered throughout the statement, with “moderate” growth in private consumption spending and “subdued” investment outside of the resource sector while noting “the peak in resource investment is approaching.” With the exception of a relatively upbeat global assessment, the statement erred slightly to the dovish side of neutral when referring to the local economy.