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5 Feb 2013
Forex Flash: The Yen is on fire – Nomura
Nomura Strategists Jens Nordvig and Charles St-Arnaud not that 2013 has seen some historic move so far, and each of them seems to be quite independent of the other, although the shift in global yield curves is playing a role.
They see that the Yen is continuing to weaken as the market is getting increasingly optimistic that Mr. Abe's reflationary push can work out. They note that they have commented for a while that if the BoJ is successful in achieving a 2pct inflation target, it would be consistent with USD/JPY levels above 95. Following the latest BoJ meeting, they initially thought the market would pause, as the change in inflation target was not immediately backed up by any decisive balance sheet expansion.
This proved wrong and they see that the market is now looking ahead towards; firstly, the appointment of a new BoJ Governor, the process of which is set to start after the BoJ meeting on Feb 14th, and secondly, other initiatives which may be part of an asset allocation shift away from the safe low yielding assets and towards equity and foreign assets, which is consistent with higher domestic inflation risk.
In this context, the think it is interesting that the head of Japan´s public pension fund suggested this weekend that it was time to reduce the allocation to domestic bonds over the next fiscal year. They write, “While it will be very controversial internationally for Japan to buy foreign bonds in a way supported by the BoJ, it is a different matter if local asset managers are buying more foreign assets.” The figures will not be quite as large as those circulated in the election campaign when foreign bond buying was initially discussed, but they feel that if the public pension fund shifts 10pct into foreign assets, that action alone is worth north of USD100bn, and other entities may follow.
Finally, they see some indications that inflation expectations are gradually shifting and there is no doubt that Mr. Abe´s aggressive policy push is having an impact on psychology. They finish by commenting, “All told, the yen move could keep going for now. And the real test: whether a decisive move in inflation and inflation expectations will actually materialize may only happen at a later stage, once the momentum of the shift in psychology and asset allocation fades.”
They see that the Yen is continuing to weaken as the market is getting increasingly optimistic that Mr. Abe's reflationary push can work out. They note that they have commented for a while that if the BoJ is successful in achieving a 2pct inflation target, it would be consistent with USD/JPY levels above 95. Following the latest BoJ meeting, they initially thought the market would pause, as the change in inflation target was not immediately backed up by any decisive balance sheet expansion.
This proved wrong and they see that the market is now looking ahead towards; firstly, the appointment of a new BoJ Governor, the process of which is set to start after the BoJ meeting on Feb 14th, and secondly, other initiatives which may be part of an asset allocation shift away from the safe low yielding assets and towards equity and foreign assets, which is consistent with higher domestic inflation risk.
In this context, the think it is interesting that the head of Japan´s public pension fund suggested this weekend that it was time to reduce the allocation to domestic bonds over the next fiscal year. They write, “While it will be very controversial internationally for Japan to buy foreign bonds in a way supported by the BoJ, it is a different matter if local asset managers are buying more foreign assets.” The figures will not be quite as large as those circulated in the election campaign when foreign bond buying was initially discussed, but they feel that if the public pension fund shifts 10pct into foreign assets, that action alone is worth north of USD100bn, and other entities may follow.
Finally, they see some indications that inflation expectations are gradually shifting and there is no doubt that Mr. Abe´s aggressive policy push is having an impact on psychology. They finish by commenting, “All told, the yen move could keep going for now. And the real test: whether a decisive move in inflation and inflation expectations will actually materialize may only happen at a later stage, once the momentum of the shift in psychology and asset allocation fades.”