With the weakness in Europe, concerns around China and lessen expectations around further stimulus from the Federal Reserve the Japanese yen has managed either sideways action (vs GBP and EUR) or strength (vs USD, AUD, NZD, CAD) in the last few weeks.
Those three factors could be key to seeing a pullback in US equities which can weaken risk sentiment and therefore continue to favor the Japanese yen as traders and investors wind down some of their carry trade strategies.
Jpy fundermentals from fxtimes
What if the Japanese investors and households which have been financing this debt load decide they do not want Japanese bonds any more, or demand a higher yield to hold them? That situation could come about if Japanese investors believe that inflation will rise – perhaps the Bank of Japan’s latest round of QE helping to spur those expectations. A crisis of confidence could also cause a sell off in the Japanese bond market.
Even a 1% move in the 10-year Japanese yields can create a big surge in the cost to finance the debt load.
From Marketwatch: “Even though the yield on 10-year Japanese Government Bonds (JGB) is only 1%, the interest expense is expected to top ¥22.3 trillion in the fiscal year that begins next month. This is one-quarter of the general account budget. If the bond yield rises to 2%, the interest expense would surpass the total expected tax revenue of ¥42.3 trillion.”
Here’s a look at the trend in the cost to finance the Japanese debt load, again up through 2010:
Bank of Japan To Buy As Much Bonds as Government is Issuing in Upcoming Year
What has the market concerned is that the deteriorating outlook in the government’s fiscal position will be massaged by the bond buying program of the Bank of Japan.
From The Wall Street Journal: “The distinction—between buying bonds to stimulate the economy and doing so to bail out free-spending politicians—is important to economists and central banks. The controversial practice of “monetizing the debt” is considered dangerous because it could encourage profligate governments to keep borrowing, risk setting off runaway inflation, and undermine central-bank independence by lashing monetary policy to political spending decisions.
The total amount of the central bank’s planned government debt purchase through the end of this year jumped to nearly ¥38 trillion ($465 billion), an amount roughly equal to all the new bond issuance planned by the Japanese government for the period. This is the first time since the program began in October 2010 that central-bank-asset purchases came anywhere near the amount of government new issuance.
From the program’s inception in October 2010 through the February meeting, the BOJ bought ¥4 trillion in JGBs through that facility. Gov. Shirakawa said the central bank will purchase ¥15 trillion more through the end of this year.”
Larger BOJ Balance Sheet Should Continue to Pressure JPY
One of the few ways out for the Japanese economy, its government and the central bank is for the JPY to continue its depreciation. It seems that the BOJ will be playing from the Fed’s and BOE’s playbook at this point – buy up bonds from a government that is spending at an unsustainable level, and through QE try and weaken the currency to help exporters and restore competitiveness for the economy.
That means that the BOJ gets more aggressive in expanding its balance sheet as a percentage of GDP, and with that increase, further downward pressure on the JPY.
We cover these macro and finance themes as part of our daily Market Intelligence Briefings. For information on special subscription rates for FXTimes briefings, click here.
Nick Nasad is a macro economist, market analyst, and educator; and one of the main contributors to FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading
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12/042012 Tagarget Reached 66.87
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12/042012 Tagarget Reached 66.87
My entry was @ 65.833 stop at break even now gonna see if i can ride it to target @ 66.87
ReplyDeleteTarget Reached 66.87 a million pips
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