Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 31 October 2014 at 9:15 GMT

BoJ's desperate QE move could see USDJPY hit 125/135

Chief Economist & CIO / Saxo Bank
  • BoJ surprises market with increase in targeted monetary base to JPY 80 trillion
  • Impact on yen could see USDJPY head towards 135
  • Continuation of 'pretend-and-extend' as bankruptcy of policy unveiled

By Steen Jakobsen

The Bank of Japan has increased the targeted monetary base from JPY 60-70 trillion to JPY 80 trillion an increase of 25-35% and an almost desperate move to keep the Abenomics' wheels going. 

The decision is quite controversial as the vote was a narrow 5/4. This is extremely unusual as big decisions like these are generally only done with full consensus, but it clearly shows Abenomics is running out of time and room as core-inflation, excluding tax, was at 1.1% vs. the 2.0% target.

The International Monetary Fund has been critical of Abenomics recently telling Japan that is falling short of helping the economy. 

From a market perspective the move today was almost perfectly timed coming on the heels of a Federal Open Market Committee meeting which ended quantitative easing and expose the big difference on future monetary paths between the BoJ and the Fed.

Dark side

There is, however, a dark side to this big move.

Prime Minister Shinzo Abe needs and needs to decide soon on whether to increase sales tax, VAT, again or disappoint on his third arrow. 

Abenomics has not deserved its name as a new approach. it has been all about printing money and making the state take a bigger and bigger role. It is hardly a new policy but more a reflection on an inability to change a conservative society with poor demographics.

Tactical and trading wise, the USDJPY has reached a new high and it’s hard to fade a central so desperate is very likely as US dollar strength the name of the game through Mid-November.

Through today, TOPIX has moved into a small positive for the year +2.00% (in JPY) vs. +8.3% for S&P and minus 4.5% for DAX. 

The easier monetary policy will force USDJPY and NIKKEI higher as it’s a one-way street, but it will more importantly force Japanese banks to lend out and overseas. 

I see/hear desperate Japanese bankers trolling the world to find things to finance and it seems they are in desperate need of US dollar funding (I.e: they have not hedged proportionally). 

This could make USDJPY test 125/135 over coming months but the “risk” remains China, which even prior to this action was upset at the ‘beggar thy neighbour' policy of Japan.

 The BoJ's QE move is a desperate measure that will hurt the 
yen and the spending power of the population. Photo: Thinkstock

One-trick pony

Overall, tactically, it confirms the world is again moving towards lower yields in G10. A new low remains my only and main call and furthermore as big a move as this is, it also tells a story of how central banks, even the desperate ones like BoJ, are and remain one-trick-pony institutions. 

Personally I see this as the final round – Japan was ALWAYS going to give it one more shot – now it happened. 

The European Central Bank will have its last shot next year, and the Fed will stop short hiking rates before at least December 2015 (from consensus June 2015 now). 

Yes, the world has gone full circle. We started the year in full recovery the worst is over, now we see that things have reversed into pretend-and-extend version 6.0.

-- Edited by Martin O'Rourke

Steen Jakobsen is chief economist at social trading leader Saxo Bank.
Jim Earls Jim Earls
14 thumbs up-congrats, but makes one think the boat is now loaded to one side.


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