Will Yen Strength Lead Abe To Call On The BoJ Again?

The bold easing of monetary conditions, an integral part of Abenomics, a set of economic policies advocated by Prime Minister Shinzo Abe, successfully resulted in a weaker Japanese yen, which fell by more than 20% at its peak in early May. Since then however, the currency has regained some strength, and is now trading at JPY 96.70/US$, just 12% weaker than the levels at the beginning of 2013. Such a trend raises questions regarding the effectiveness and sustainability of Abenomics, as well as raises the possibility of future action, given that a weaker yen was one of the means touted by Abe's administration to support the export sector, which remains widely seen as a key sector to drive future growth.

Currently, the Japanese yen is breaking through trendline resistance. With a technical head-and-shoulders formation that has emerged over the past eight months, a clean break of this resistance line could see the currency strengthen sharply, possibly moving back to JPY86.00/US$. In particular, we note that the Japanese yen-Korean won cross rate looks technically primed to head in the yen's favour, after forming a double bottom since bouncing off two-year resistance at KRW10.67/JPY.

Such sudden strength in the yen would signal a potential reversal in the economic confidence that participants may have in Prime Minister Abe and his policies. Given that a decline in confidence could have severe ramification on the Abe's ability to consolidate support within his party for future policies, the possibility of more intervention by the Bank of Japan (BoJ) cannot be ruled out. We note that further monetary easing would be the easiest lever to employ in the near term, given that the use of fiscal stimulus has a less direct impact on the currency and could further undermine the image of fiscal rehabilitation that the government has been eager to project.

A Bout Of Strength On The Cards?
Exchange Rate - JPY/US$ (LHS) & KRW/JPY (RHS)

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This article is tagged to:
Geography: Japan