Jim O'Neill has been to Asia and he had this to say about the yen this morning:
Last week’s Viewpoint was entitled “We Want Abe”, the timing seemed rather apt ahead of my trip, not least as the Japanese media gave the piece prominent attention, and of course, the Yen had quite a move this week. Many of my conversations in Tokyo and also in HK, focused on these issues. Thursday’s edition of the English-speaking Japan Times had a very good front page summary of the policy aspects the LDP are proposing. The piece also covered some of the debate surrounding the more aggressive aspects of what Abe personally suggests and what and where it could get toned down.
The Japan Times piece is consistent with what I picked up whilst I was away and confirmed what I was thinking after my brief trip. An exact Abe-style 3% inflation target is not likely to be introduced early on, but rather a new LDP coalition-led pact with the BOJ to shift their target towards 2% instead of 1%. The fact that it could be more of a genuine target than a vague, broad goal is perhaps key to note.
Behind all of this, I would suggest the following points are worth pondering;
1. I think current Japanese policymakers are quite eager for the Yen to decline to reverse what is widely regarded as an unjustified overvaluation since the Lehman crisis in late 2008. This belief seems stronger than I had realised before I went, but is very consistent with a GSDEER type view of the Yen and therefore my own. In this context, there is some pleasure that Abe’s policy ideas are getting market attention even from those that don’t really believe the specifics to be either appropriate or achievable.
2. Further comments from Abe Friday summed up an important issue. He said that faster Japanese money supply growth was the right way to weaken the Yen as opposed to intervention. One of the problems that both MOF and the BOJ have persistently faced since 2008 is that other nations have been very reluctant to support official intervention to weaken the Yen; hence why it is has been very occasional and tepid. If the Yen were to weaken because of ’fundamentals’, then it would not only be difficult for Washington DC, Frankfurt, Brussels, and perhaps even Beijing, to object and, if those fundamentals that caused it were likely to raise the likelihood of a stronger Japanese economy, some of them would probably like it.
3. It currently seems likely that the LDP will win the election and Abe will become PM. However, it is unlikely that the LDP will have a majority so a coalition of some sort will be formed. This means some compromises on policy issues and this might restrain some of the more aggressive aspects of what Abe has said in public. Some other senior LDP members were quoted in the Japan Times piece with one voicing disagreement with the idea of the BOJ being forced to buy specially issued Construction bonds. My impression is that the outgoing Noda’s conviction on tougher structural fiscal tightening led by this consumption tax is respected by many, if not the top LDP people.
4. Corporate Japan also believes that stronger efforts are needed to weaken the Yen, which is coming from a number of different sectors and is quite strong. Given the historic commitments to employment and the broad social pact, this in itself is quite a big issue. The corporates that are not yet suffering a competitive disadvantage are talking more seriously about shifting overseas. Amongst this community, there is angst about EUR/Yen and KRW/Yen as well as $/Yen.
5. Within the investment community, and especially the ’Mrs. Watanabe’ retail aggregators, the demand for exotic foreign bond products and, more than people overseas realise, equities, remains very substantial. Any evidence of a trend change in the Yen would add to this significantly. I met with many of these important investors during my brief trip, and their interest spreads way beyond the BRL these days with Russia, Mexico, Chile and Columbia on the radar in addition to the better known ones.
All in all, I return thinking that we are witnessing the beginnings of a notable reversal in the Yen. This could be a quick or slow move, pending the complexity of the new coalition and, of course, developments overseas, especially the US economy and the future of US interest rates. I am not sure that there are any major implications for JGBs, but the rally in the Nikkei should continue to move in line with Yen weakness.