USDJPY: Near-Term Outlook

Political risks are in the forefront in late 2012. Central banks’ economic stimuli seem to be exhausted.

In this aspect, financial markets will probably have to count on politicians in terms of resolving deep structural problems of the West. The global economic growth is faint and fragile as even emerging economies start seeing a slowdown in growth.

How will major currencies (yen, dollar, pound, euro etc) behave in late 2012 – early 2013. Let’s have a closer look at the situation.

Expert Opinion: Global Crisis Still Underway

The global economic growth started slowing down in early 2012. In Q3 2012, central banks started reacting with unconventional measures.

Economic recovery keeps facing multiple obstacles on its way while changes in money-and-credit policies need time to take full effect and bring major changes to the current economic situation. Indicators remain weak as more experts make gloomy forecasts. A major decline in global demand resulted in a global trade slowdown. Financial reconstruction in numerous countries around the globe is in jeopardy:

USA. Since the local high (4.1%) set in Q4 2011, the pace of the US economic growth slowed down to 2.0% in Q1 2012 and 1.7% in Q2 2012. Since the beginning of Q3 2012, economic reports have been indicating job cuts, weaker consumer sentiment and an industrial production decline.  Consumer spending, which accounts for the lion’s share of the US economy, has weakened as well (more than expected).

The Fed downgraded its forecast for the GDP growth in 2012 twice in September, even after it announced another round of quantitative easing (QE3). The Fed expects the US GDP to decline down to 1.7% through 2.0% this year prior to growing up to 2.5%-3.0% in 2013.

China. China’s economic slowdown has surprised most investors. The latest report indicates 7.6% (y/y) growth.  Moreover, the country’s industrial production grew for at least 3 years, the year-over-year readings reached 8.9% in August. Despite the growing external trade surplus, China’s import declined during the reporting period, which indicates a decline in the demand for natural resources. This also indicates a potential slowdown in the Australian economy, which is a major exporter of coal and iron ore to China. The political response is still rather reserved as Chinese politicians face inflation growth and economic slowdown at the same time.

Japan. The economic recovery in the world’s 3^rd biggest economy is unstable and faint. The GDP forecast was downgraded from 1.4% down to 0.7% in Q2 2012. The strengthening of the Japanese currency was one of the key factors hindering Japan’s economic growth as a result of an export decline.

Japanese Crisis

What is wrong with the world-famous Japanese “economic miracle” model?

So far, the Bank of Japan has been striving to reach the 15 inflation target. Within the framework of its own efforts to raise prices, the BOJ keeps purchasing bonds since late 2010.  Mr. Shirakawa, BOJ Governor, has confirmed that the central bank is determined to keep pursuing its quantitative easing policy until it reaches the inflation target. However, several attempts failed, thereby making the Japanese economy falling deeper into recession.

During the latest meeting, the BOJ expanded its quantitative easing prоgram from  ¥70.000bn up to  ¥80.000bn.

Still, the Japanese Yen is mainly driven by external factors (local policies are not the main factor).

The key factor determining the USDJPY exchange rate is the US bond yield. The yield has been growing so far and is expected to continue the growth amid higher inflation expectations.

Japanese Yen – A Major Safe-Haven Asset

Since the end of World War II, the Japanese Yen has been showing steady trend against the US Dollar. According to Ilya Preser, the head of the DFWA Department of , there are no signs indicating the end of the long-term rally.

The Japanese Yen remains a safe-haven asset.

The forecasts are gloomy. If to look at the chart below, we can see that those multiple interventions in the currency market implemented by the BOJ haven’t changed the situation dramatically.

Therefore, the currency pair will most likely stop the current rally (started in September) and will be going down over the next few months.