FXStreet (Barcelona) – Alan Ruskin, Macro strategist at Deutsche Bank, explains that although the Japanese yen remains extremely weak on long-term valuation metric and Japanese policy makers having voiced their concerns, the US rates scenario ahead will still lead USD/JPY higher towards 130 levels.
Key Quotes
“The yen has weakened by over 50% versus the USD since the USD/JPY lows, helped by BOJ QE. USD/JPY recently broke above Y125 as derivative (short vol) ‘range’ plays were stopped out. BOJ’s Kuroda (and before that Finance Minister Aso) have shown no appetite to build on yen weakness. Why?
i) because the yen is already extremely weak on every long-term valuation metric;
ii) Japan real exports are far from strong, but are stronger than most global peers.
iii) a weaker exchange rate is a source of direct inflation through import prices but this is a one off influence. The more important source of inflation is how the weak yen lifts production to close the output gap. The BoJ views the output gap as close to shut providing a slow but more sustainable source of inflation.
iv) Just as important, there is no need at this juncture to inspire a stronger Nikkei through a weaker currency. Why use this equity channel to support growth now, when equities are far from cheap; when the currency is already cheap; and, where reinforcing a cheap currency higher asset price model only opens the door to future volatility.”
“DB’s marginally stronger USD/JPY scenario to Y130 next year relies on US rates, and not the Japan side of the equation.”
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