JPY STRENGTH HOLDS AS USD/JPY RE-APPROACHES 110.00

Fundamental Forecast for the Yen: Neutral

The Japanese Yen continues to hold strength as we move through the middle of August, and this is a theme that’s been rather visible so far throughout 2018. As we came into the year, the prospect of stronger rates of inflation pushing the BoJ away from their uber-loose monetary policy kept a bid behind the Yen, with buyers helping to reverse years of Abe-nomics fueled weakness.

This can be driven back to Japan’s continued saga with inflation. In 2012, current Prime Minister Shinzo Abe re-emerged in the nation’s top political seat, largely on a campaign built around solving the decades-long struggle with deflation and the economic weakness which came along with it. Shinzo Abe’s ‘three pillars’ approach towards economic policy helped to bring about three years of Yen weakness, with USD/JPY rising from a pre-Abe area from below 80.00 to as high as 125.00 in the summer of 2015. But later in the summer of 2015 is when another theme began to re-emerge, and that was weakness in China, which helped to spike risk aversion around the world.

As risk aversion flows heated up in latter-2015 and the first half of 2016, Yen strength remained as a rather constant theme. This didn’t begin to reverse until the US Presidential Election, at which point the Yen showed some very visible weakness for the next three months before finally topping-out again. Since then – its largely been an exhibition of Yen strength, as can be evidenced from the descending trend-line on the chart below that held the highs in USD/JPY for the most of the next 18 months.

USD/JPY WEEKLY PRICE CHART

Chart prepared by James Stanley

As we came into Q3, USD/JPY broke out as Yen weakness began to re-emerge again. This was largely on the basis of inflation falling back below 1%, removing the worry that the BoJ may soon be nearing their own announcement of stimulus taper. This got another wind of life in early-August at the Bank of Japan rate decision, as the BoJ made tweaks to their policy outlay to afford more flexibility moving forward.