JPY: Weighing the risks - Rabobank

Jane Foley, Research Analyst at Rabobank, suggests that the recent upward revision to Japan’s Q1 GDP growth performance to 0.5% q/q may offer a little respite to the Abe government but it will do little to sweep aside the underlying concerns that dog the outlook for the Japanese economy.

Key Quotes 

Even though consumption in Q1 was better than had been initially expected and despite announcement that the sales tax hike would be postponed to October 2018, the level of private demand remains weak.

The World Bank reported that private consumption in Japan “remains weak”. It stated that “a shrinking and aging labour force remains a key factor weighing on growth, investment and savings patterns”. As a consequence of the downside risk the World Bank revised down its estimate for Japanese growth by 0.8 of a percentage point and now forecasts an expansion of just 0.5% in 2016.

The outlook for consumption is not the only thorn in the side of the Japanese economy. Weak external demand remains a threat to exports, as does the risk of an appreciating yen. USD/JPY is currently trading around 13.5% below its December high. Clearly this has been an unwelcome development for Japanese exporters.

Although we have pared our 1 and 3 month USD/JPY forecasts, our central view is that the currency pair can still push higher this year. We now expect USD/JPY at 108 in 1 mth and 109.00 in 3 months. The upward bias in this forecast assumes that the Fed will be on a position to hike rates by September and that further stimulus will be announced by the Bank of Japan in the coming months an attempt to shore up domestic demand and support inflation expectations.

High levels of unproductive capacity and the rapid build-up of debt still threatens to put a sharp brake on growth. Any such headwinds coming from China are likely to increase safe haven demand for the yen. Interestingly against the backdrop of sluggish world growth, the yen never fully gave up the safe haven demand that pushed it higher in the early weeks of 2016 as world stock markets corrected lower. Another bout of safe haven demand would put USD/JPY 105 in clear sight.”