Bank of Japan normalising policy could become JPY positive
Japan has just achieved something amazing and it could be a JPY positive. It has just enjoyed the longest period of economic growth since 2001 triggering speculation that it might start calling time on the Bank of Japan’s (BoJ) heroic stimulus efforts.
Any signs that the BoJ is about to start winding down its massive quantitative easing programme should be a JPY positive as it would bring the central bank in line with moves by its peers in other leading developed economies.
Indeed, Japan has just enjoyed seven quarters in a row of economic growth and in Q3 grew at an annualised 1.4% following four years of full on stimulus efforts. This has been helped by exports boosted by stronger economic growth in the global economy, though domestic consumption has been sluggish.
Also, the convincing election victory by Prime Minister Shinzo Abe last month gives Japan an air of political stability not enjoyed in other developed states, such as the UK and much of Europe where Germany, for instance, is still struggling to forge a coalition government.
Speculation that the time might soon be arriving when the BoJ needs to start dialling down its stimulus came from comments by a former board member of the central bank Sayuri Shirai on Friday. He warned that carrying on unabated, the BoJ’s policies could damage the economy by undermining the banking system and suggested that the central bank should raise its yield target on Japan Government bonds next year.
However, he acknowledges that this could be difficult under Abe because of his focus on a weak JPY, inflating assets prices and economic growth. But a widening trade deficit with the US could pressure Abe to reverse his weak JPY policy at some point.
If talk of slowing down the BoJ’s policy becomes louder then it could become fuel for a JPY rally. However, this column believes the scope to place the Japanese economy on a self-sustaining growth path is relatively limited. Around a quarter of the country’s population is over 65 and by 2055 that rises to a staggering 40% and over that time the population is set to shrink by 20% as deaths outpace births. That’s a big economic drag.
There are only two ways to counter that. Mass immigration - a ‘no no’ in Japan or a massive boost to productivity, and though that may come, in practice it is very difficult to achieve. In other words Abenomics may never quite wind down with global crises more likely to create demand for JPY given its safe-haven status, but occasional speculation over BoJ winding down its stimulus could provide the occasional JPY rally.
TECHNICAL ANALYSIS: USD/JPY looks poised for more losses
Levels of around USD/JPY 114.00 appear to trigger a reversal and this has occurred three times now since May with early November being the latest occasion for this occurrence. On the previous two occasions this has led to tests of levels around 109.00 and this could be the in cards again.
The first test of whether it’s a case of third time lucky on this pattern is if the pair can take out support levels of around 111.00. Nonetheless, there was a sharp perforation of the lower Bollinger band on Friday, which usually leads to an equally sharp reversal. So any tests of support around 111.00 may have to wait until later in the week if they do occur.
Resistance can be seen at 112.57, 112.64, 112.86 and 113.10 with support placed around and 111.93, 111.76, 111.66, 111.49 and 110.90
By Justin Pugsley, Markets Analyst, MahiFX