Research Team at Danske Bank, notes that the Japanese GDP contracted 0.3% q/q in Q4 15, and they see a high risk of a technical recession in Q4-Q1 with yet another negative growth rate in Q1.
Key Quotes
“Inflation printed at 0.0% y/y in January and is likely to remain subdued due to the combination of a falling oil price and appreciation of the yen, which has appreciated more than 6% in trade-weighted NEER terms year-to-date.
Monetary policy. Given the weak inflation and growth outlook, we maintain the view that more monetary easing is warranted and we have moved forward our call on the BoJ from July to April. We expect it to cut its key policy rate by 20bp to -0.3% on 28 April while keeping its QE programme unchanged at JPY80trn per month.
Flows. Japan’s trade balance improved substantially in 2015 to a current account surplus of 3.3% of GDP, providing increasing support to JPY.
Valuation. USD/JPY is significantly overvalued. PPP is around 82, while our MEVA model suggests 104 is ‘fundamentally’ justified.
Risk. USD/JPY remains highly correlated with investors’ risk appetite. Investors are speculatively long JPY – the most stretched long positioning since 2011, suggesting that the cross probably is less sensitive to further sell-off in risk assets.
USD/JPY has continued to fall sharply in March as most other central banks, including the Fed, have turned more dovish. We now expect the BoJ to cut interest by 20bp on 28 April as a response to a weaker growth outlook and the risk of low wage growth. The effect on the currency might be limited in the short run as the BoJ currently is fighting gravity as fundamental factors and flows (among others stemming from a rising current account surplus) and stretched valuations provide substantial support to the yen at the moment. We forecast USD/JPY at 112 in 1M (previously 116) and 115 in 3M (117).
Longer term, fiscal headwinds are looming in terms of a possible vat increase in April 2017. At the same time, we expect the Fed to resume its hiking cycle in September. This will probably help in turning the tide for the JPY, allowing it to remain significantly undervalued for a prolonged period. Hence, with the support from cyclical divergence and relative monetary policy we continue see a case for a higher USD/JPY over the medium-term horizon. We now forecast USD/JPY at 118 in 6-12M (120).”
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