30 Mar 2016
JPY: Impact on economy of strong yen – Nomura
FX strategy team at Nomura, had lowered its end-2016 USD/JPY forecast to 122, from 130.
Key Quotes
“Based on the new forex outlook, key economic data points for February scheduled for release, and deliberations on the FY16 supplementary budget, we plan to revise our macroeconomic forecasts, but prior to that, we would like to consider the effect on our macroeconomic forecasts of the new forex assumptions.
Adverse effect on capex: limited, but downside risk warrants attention
We estimate a 10% appreciation in the value of the yen against the dollar has the effect of reducing recurring profits at Japanese companies by about ¥0.8trn. We estimate this depresses cash flows at Japanese companies by about 0.8%. Given that the ratio of cash flows to capex has been fairly stable, we think the adverse effect on capex from a 10% appreciation in the value of the yen against the dollar would be minimal. We think this view is supported by the capital expenditure survey in the recently released Business Outlook Survey. The adverse effect of the strong yen is relatively big in some manufacturing sectors and we think downside risk to capex in manufacturing warrants attention.
Effect on inflation: weighs down core CPI inflation in FY17 by about 0.2ppt
The strong yen weighs on inflation by pushing down import prices. Taking February data into account as well, the new forex assumption has no effect on our core CPI inflation forecast for FY16 of -0.1% y-y, but lowers that for FY17 to +0.6%, from +0.8%.
Effect on private-sector consumption: somewhat positive impact via improvement in real incomes
The main way our new forex assumption affects private-sector consumption is by dragging down CPI inflation. However, we estimate private-sector consumption will be boosted no more than 0.1ppt in FY17.”
Key Quotes
“Based on the new forex outlook, key economic data points for February scheduled for release, and deliberations on the FY16 supplementary budget, we plan to revise our macroeconomic forecasts, but prior to that, we would like to consider the effect on our macroeconomic forecasts of the new forex assumptions.
Adverse effect on capex: limited, but downside risk warrants attention
We estimate a 10% appreciation in the value of the yen against the dollar has the effect of reducing recurring profits at Japanese companies by about ¥0.8trn. We estimate this depresses cash flows at Japanese companies by about 0.8%. Given that the ratio of cash flows to capex has been fairly stable, we think the adverse effect on capex from a 10% appreciation in the value of the yen against the dollar would be minimal. We think this view is supported by the capital expenditure survey in the recently released Business Outlook Survey. The adverse effect of the strong yen is relatively big in some manufacturing sectors and we think downside risk to capex in manufacturing warrants attention.
Effect on inflation: weighs down core CPI inflation in FY17 by about 0.2ppt
The strong yen weighs on inflation by pushing down import prices. Taking February data into account as well, the new forex assumption has no effect on our core CPI inflation forecast for FY16 of -0.1% y-y, but lowers that for FY17 to +0.6%, from +0.8%.
Effect on private-sector consumption: somewhat positive impact via improvement in real incomes
The main way our new forex assumption affects private-sector consumption is by dragging down CPI inflation. However, we estimate private-sector consumption will be boosted no more than 0.1ppt in FY17.”