The following is an extract from our quarterly outlook, published 23rd June 2014. I’ve included a table of forecasts at the foot of the blog.
The yen fell into a relative slumber in the first half of 2014, USDJPY falling to trade in the 101-104 range for the most part. The momentum towards policy induced weakness waned together with the government’s inability to follow through on the much heralded structural reforms. The BoJ, having done its bit, stood back whilst the consumption tax hike took place and the structural reforms failed to materialise in any meaningful sense.
The outlook for the second half of 2014 is still for a weaker currency, but only modestly so. There are three forces behind this. Firstly, the structural current account surplus that has meant Japan has been the largest creditor nation for the past two decades is moving into negative territory. There is not a strong causal relationship between this and a weaker currency, but it represents a change that will start to impact in the coming quarters and years. Secondly, there is the shift towards greater investment overseas from Japanese investors, something that has been much talked about, but has yet to happen in any meaningful way. That said, the pressures on Japanese savers to enhance returns is getting ever greater. Thirdly, there is a realisation on the part of the government that pushing ahead with structural reforms is the most likely path towards gaining further yen weakness, the BoJ’s ability to further weaken the currency becoming ever more curtailed.