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Japan economy: Yen, inflation 2013 key focus

Publish Date15/01/2013 04:23:57 PM

Last Update17/01/2013 08:19:20 AM

Japan economy: Yen, inflation 2013 key focus

In this report, we will view expectations for inflation in Japan during 2013 and key monetary policies and their contribution to achieving inflation target.

We will also tackle the Japanese yen`s performance expected after mentioned measures take effect and whether they reflect the new government`s objectives, thus depreciate the yen in 2013.

Inflation

Bank of Japan failed to meet the 1.0% target in 2012 when the inflation index dropped for six months following 0.2% advance in April. Deflation then grew and became Japan`s 2012 foremost worry.

Shinzo Abe government`s anxiousness to end decade-long deflation compelled it, in turn, to force BoJ to place new inflation target at 2%.

Although central bank Governor Masaaki Shirakawa was not convinced of such target being achieved in the first place, he announced that the bank will discuss price stability over the medium and short terms ahead in its first meeting in 2013 on January, 21-22.

This indicates how the bank is willing to respond to Mr. Abe`s wishes, which are expected to contribute a great deal to achieving the 2.0% target.

We expect that monetary stimulus and facilitating liquidity alongside weakening the yen should be sufficient to raise inflation rates . However, in order for such effect to surface, main inflation index – the consumer price index excluding fresh food – should climb steadily for several consecutive months before resorting to increasing sales tax. In general, we expect Japan won`t be able to reach 2.0% inflation target in 2013.

Monetary Policy

The latest of monetary policy measures in 2012 was expanding the asset-purchase program by 10 trillion yens, tallying a total of 76 trillion yens ($906 billion). Meanwhile, the Bank of Japan kept Funding for Lending steady at 25 trillion yens.

BoJ also extended agreements of exchanging the local currency with foreign counterparts with five major central banks, of which was the U.S. Federal Reserve until February.

These monetary programs could depreciate the yen and help major Japanese firms to offset losses due to higher yen value and backwardness in global demand on the country`s products.

Meanwhile, BoJ expects Japan`s economy to remain rather weak and in a state of volatility during the first half of 2013 in line with economies of the U.S. and Europe, and ongoing political tensions with China, before those programs start to show the effect in the second half.

Our expectations for Japan`s monetary policies` performance in 2013 lie within two specific dates; first of which, is January 21-22 when BoJ is scheduled to hold its first meeting of the year. In this meeting, the bank will announce details of the unlimited QE program next to adopting a decision on whether to activate official inflation target at 2% or not.

The second date will be April 8 marking the end of BoJ Governor Masaaki Shirakawa`s term, along with his two deputies. This will be an opportunity for the premier to reconstruct the bank in a way that ensures zero hindrances to his plan to bolster Japan`s economy.

These two dates are of utmost importance to Japan`s economic performance ; activating monetary programs in the BoJ meeting will largely contribute to weakening the local currency hence making way for actual growth in the first or second quarters of 2013.

As for reconstructing the foundations of the central bank, it will be of major help to passing several laws and procedures the new government might require, such as bank`s purchase of bonds to transform public debt into cash liquidity. This move is fended off by Shirakawa.

Yen Performance

The yen dropped in 2012 against the U.S. dollar by 15%, the steepest amongst the ten currencies representing advanced countries` markets.

When LDP took over the government and clarified its interests, major financial firms, such as JPMorgan Chase & Co., modified expectations for the yen`s performance. They project the yen would drop to 90 yens against the dollar by the second quarter of 2013 following expectations of 83. Nomura Holdings Inc. raised its evaluation as well to 90 after previous 85.

Above expectations support the decline in yen in 2013 in accordance with the new protocol Japanese government is pursuing, and the significant pressure it adds to BoJ to facilitate liquidity in financial markets.

Hereon, we back our expectations with a technical point of view.

After the USD/JPY pair hit lowest at 75.55, it managed to rise again and break through the neckline of the Inverted Head & Shoulders Pattern over the past month. This was after a positive closing above the Moving Average (MA) 50, as seen on the graph.

The pair is now trading around critical areas 23.6% Fibonacci of the upside wave that commenced at 124.13 (recorded first week of June, 2007) and ended at the area mentioned before.

This level could bring the pair back bearishly to retest the neckline of the aforementioned pattern before it finishes bullishness to complete the targets.

Technical objective of the pattern is measured by the distance from the head to the neckline. With that, the pair will be on its way to 94.00 over the medium term, which represents 38.2% Fibonacci as well for the wave mentioned.

The risk-limit is a breach of 81.60 which will be sufficient for ending the pair`s bullishness, as it is also to perishing the hopes of the Japanese government to attaining a weaker currency that could contribute to spurring wavering economy!

Financial companies expectations for Japan during 2013:

2014  

2013  

2012  

 

 

1.00

 

0.65

 

1.70

 

Annual GDP (%)  

 

1.70

 

0.00

 

0.00

 

Annual CPI (%)  

 

4.00

 

4.20

 

4.40

 

Unemployment (%)

 

1.55

 

1.30

 

1.10

 

Current Account (% of GDP)

 

-

 

0.10

 

0.10

 

Central Bank Interest Rate (%)

 

88.00

 

85.00

 

80.00

 

USD/JPY Exchange Value

 

108.00

 

107.00

 

102.00

 

EUR/JPY Exchange Value

 

Bank of Japan Expectations:

2014

2013

2012

 

 

-

 

1.60

 

2.20

 

Annual GDP (%)

 

-

 

0.50

 

0.10

 

Annual CPI (%)

 

4.23

 

4.23

 

4.23

 

Unemployment (%)

 

GDP Expectations

2014

2013

2012

 

 

-

 

1.2

 

2.2

 

IMF

 

0.8

 

0.7

 

0.8

 

OECD


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