A view from Tokyo
Traders will have their own views but commenting on the market implications of Sunday’s Japanese national election result, Takahiro Sekido, Japan Strategist at MUFG Tokyo, wrote on Monday that “the current outward balance differs fundamentally from during the so-called Abe Trade market of 2013-2014.” Meanwhile MUFG London argued on Monday that “the problem we see for sustained yen weakness is whether this election victory will dramatically alter the clear scepticism in the markets over the ability of [Bank of Japan] monetary policy to lift inflation in Japan” and that “there is certainly a risk that PM Abe’s focus could be seen as shifting to constitutional change at the expense of ‘Abenomics’ which would only reinforce doubts over lifting inflation, which would in turn limit the scope for further yen depreciation going forward.” Yen bears would no doubt beg to differ.
Nevertheless, it might be worth focusing on why Sekido believes circumstances have altered in Japan since 2013-14, when the Abe Trade was associated with marked yen depreciation. Sekido argues that since that period Japan has returned to a trade surplus “as imports have fallen because of lower resource prices and as exports to China and the US have risen.” That situation lends itself to net yen buying. Additionally, Sekido’s view is that at an investment level there has been a change in supply-demand conditions for yen. For example, the Japanese analyst feels that inward investment flows from abroad have exercised a degree of support for the Japanese currency with those “intermittent inflows from direct investments and long-term stock investments not hedged for exchange rate changes.” MUFG’s caution doesn’t mean yen bears will not win the day but traders may at least find it useful to be aware of the lines along which Japan’s largest bank is thinking.
Written by Neal Kimberley, External Currency Analyst.