More pain on the way for JPY?
There could be more pain on the way for JPY – not least Japan’s economic growth appears to be faltering again after it shrank 0.4% in Q2 as consumers and businesses spent less and exporters struggled abroad.
Events could be lining up to drive USD/JPY to levels of 130. The poor economic news is already stirring expectations that the Bank of Japan will increase its already enormous quantitative easing programme sometime in Q4 if the economy doesn’t pick up sufficiently.
BoJ governor Haruhiko Kuroda said around a month ago that he expects the current economic malaise to be temporary. However, the big development since then is that China is clearly in the grips of an economic slowdown, which will hurt Japanese exports plus the RMB is being steadily devalued and this will drag down other regional currencies versus USD including JPY.
Another negative for Japan is the growing pessimism over the state of the US economy – the pace of growth there could be slowing. If the US Federal Reserve does raise interest rates next month it will definitely test the economy’s robustness.
USD/JPY – JPY pain, but not much gain
May not all be one way for USD/JPY, but …
However, it isn’t all one way for USD/JPY. The rest of the year could see volatile equity markets if China really is in full devaluation and slowdown mode and that will see a flight of capital towards JPY, a traditional safe haven currency.
Though the JPY devaluation has raised costs for Japan’s consumers – who drive 60% of the economy – it has been offset to a large extent by the plunge in commodity prices. That potentially gives them more spending power.
Despite all the fanfare surrounding ‘Abenomics’, Japan continues to lurch into quarters of economic contraction. It’s experienced one so far in 2015 and has seen at least one negative quarter for every year of the last five.
And despite the massive stimulus and devaluation, the BoJ still only expects the economy to grow by 1.5% this year (and that could be revised lower). Policy makers are pining hopes on a significant pick up in wages leading to more consumer spending. But an anaemic economy saddled with deflationary pressures is hardly a good backdrop for rising wages, particularly from smaller businesses who are the main employers.
By Justin Pugsley, Markets Analyst MahiFX