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Flash: Views from Tokyo - Nomura

FXstreet.com (Barcelona) - Nomura strategists have spent the week in Tokyo, a week which was largely spent awaiting Mr Bernanke's testimony, which suggested that while no changes are imminent and purchases could slow “in the next few meetings” if the labour market is strong.

They note that risky assets sold off with Nikkei having the largest fall since 2011, while USD was mostly stronger against G10 (except JPY) and EM. They write, “We published our key takeaways from our visit to Tokyo, where we attended Nomura‟s annual Central Bank conference, meeting clients and officials. Generally, we observed that the mood had changed in Japan.”

They note that Prime Minister Abe is a constant presence on TV, while consumption has increased and there is interest in equity markets. Also, they see that key economic indicators are generally moving in the direction Abenomics intended. This holds for growth indicators, for inflation expectations, and for (most) asset prices: equity, credit and FX. However, they feel that the exception is the JGB market, where yield levels and market volatility have drifted the wrong way.

Given USD/JPY‟s recent break through 100, they feel that it is natural to ask whether you can have too much of a good thing. They detected no concern with spot above 100, and feedback suggested that there would not be any major concerns before perhaps 120 or 125. There were discussions of what could be done to stabilise the JGB market while officials seemed relatively relaxed about an orderly upward drift in yields (echoing Mr Kuroda‟s comments on Monday).

Further, they add that there was also debate on asset allocation. Asset allocation shifts in the institutional space in Japan seem relatively moderate and happening over fairly long time horizons. They write, “The biggest shift in sentiment is in equities, with bullish flows likely continuing to be an important source of support for the market.”

They finish by looking at the capital flow picture (on both FI and equity fronts) which still appears bearish JPY, and trade flows are unlikely to provide any meaningful offset in the near term. Finally, theydon‟t expect any policy shifts that are likely to meaningfully shift the current balance in the coming weeks and months. Hence, the momentum remains towards JPY weakening for now, in their view.

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