Yen: Finally, a better BoJ policy - SocGen

Kit Juckes, Research Analyst at Societe Generale, notes that in Japan, a surprise move to cut rates below zero early in 2016 backfired spectacularly, as Japanese investors were already enthusiastic buyers of foreign assets, and the BoJ acted at the height of the January-February risk sell-off.

Key Quotes

“But while that policy move was a failure, the decision to cap longer-dated yields just as they started rising elsewhere has been a huge success so far.”

“Yen weakens as global bond yields rise As long as we have a combination of decreased fiscal headwinds in Japan, rising bond yields globally and resilient US and global equity markets, the yen can remain the weakest of the major currencies. However, as is often the case, the risk is that it falls too fast, and reaches end-2017 targets long before the end of that year. We’re loathe to simply extrapolate the move and look for an even weaker yen because the fall in USD/JPY this year only took it from very undervalued to fairly valued on long-term metrics. The 10% trade-weighted fall since late September has already made the yen look cheap on long-term metrics, and another 5-10% move from here is all that we can reasonably expect.” 

“Preferred yen shorts Reduced fiscal headwinds, higher inflation expectations, lower real rates and improved corporate profitability should represent a decent tonic for the Japanese economy. That should become an FX factor at some point, but not yet. For now, we like being long EUR/JPY after the French elections, long NOK/JPY as oil prices remain reasonably well supported, and USD/JPY until it’s back above the levels at which it started 2016.”