2 Dec 2014
Japan: Rating cut unlikely to change JPY trend - Nomura
FXStreet (Bali) - Monday's rating cut to Japan by Moody's is unlikely to change JPY bear trend, notes Yujiro Goto, FX Strategist at Nomura.
Key Quotes
"Today Moody’s announced that it has cut Japan’s rating to A1 from Aa3. The agency notes the increasing uncertainty about achieving the goal of deficit reduction as one of factors behind the decision. After the government‟s decision to delay the consumption tax hike, the announcement today is not necessarily surprising."
"The impact of the rating cut on USD/JPY is likely to be short-lived, as past experiences show. 91.5% of JGBs and T-bills were held by domestic investors as of end-June, and they usually do not change their investment stances on JGBs after rating decisions. Japan‟s rating was once downgraded to A2 by Moody‟s, even below A1, but USD/JPY continued depreciating then. Japanese investors, such as lifers, have been shifting from JGBs into foreign assets, as they do not want to add JGB exposure in the currently low yield environment. If JGB yields rise owing to the rating cut, domestic investors will add exposure in JGBs at better yield levels, limiting upside room for JGB yields. This could slow the pace of portfolio shift, putting downside pressure on USD/JPY and thus, stability in JGB market will be important for JPY weakness."
"The downgrade may also influence political discussions ahead of the election on 14 December. The opposition parties may blame Abe cabinet‟s economic management for the downgrade. Nonetheless, the opposition parties were also advocating that the consumption tax hike should be delayed. Thus, it will be difficult for the opposition parties to criticise the LDP‟s decision to delay the tax hike. Although the rating downgrade may work slightly negatively for the LDP, the LDP is unlikely to lose its lead against the opposition parties, given the significant gap between them."
"The downgrade looks negative for JPY as a first glance, but the possible effects on the portfolio shift and political debate could be slightly JPY positive in the near term. As the divergence in monetary policies between the US and Japan remains large, the portfolio shift is still likely to continue and the election result may not be significantly affected. Thus, we do not judge the announcement today to change the mid-term JPY weakness trend."
Key Quotes
"Today Moody’s announced that it has cut Japan’s rating to A1 from Aa3. The agency notes the increasing uncertainty about achieving the goal of deficit reduction as one of factors behind the decision. After the government‟s decision to delay the consumption tax hike, the announcement today is not necessarily surprising."
"The impact of the rating cut on USD/JPY is likely to be short-lived, as past experiences show. 91.5% of JGBs and T-bills were held by domestic investors as of end-June, and they usually do not change their investment stances on JGBs after rating decisions. Japan‟s rating was once downgraded to A2 by Moody‟s, even below A1, but USD/JPY continued depreciating then. Japanese investors, such as lifers, have been shifting from JGBs into foreign assets, as they do not want to add JGB exposure in the currently low yield environment. If JGB yields rise owing to the rating cut, domestic investors will add exposure in JGBs at better yield levels, limiting upside room for JGB yields. This could slow the pace of portfolio shift, putting downside pressure on USD/JPY and thus, stability in JGB market will be important for JPY weakness."
"The downgrade may also influence political discussions ahead of the election on 14 December. The opposition parties may blame Abe cabinet‟s economic management for the downgrade. Nonetheless, the opposition parties were also advocating that the consumption tax hike should be delayed. Thus, it will be difficult for the opposition parties to criticise the LDP‟s decision to delay the tax hike. Although the rating downgrade may work slightly negatively for the LDP, the LDP is unlikely to lose its lead against the opposition parties, given the significant gap between them."
"The downgrade looks negative for JPY as a first glance, but the possible effects on the portfolio shift and political debate could be slightly JPY positive in the near term. As the divergence in monetary policies between the US and Japan remains large, the portfolio shift is still likely to continue and the election result may not be significantly affected. Thus, we do not judge the announcement today to change the mid-term JPY weakness trend."