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Recent drop in yen unlikely to have any inflationary impact - BTMU

FXStreet (Łódź) - Derek Halpenny, European Head of Currency Strategy at the Bank of Tokyo Mitsubishi UFJ believes that despite Japanese authorities' concerns, the recent weakness of the yen shouldn't cause much damage to the country's economy.

Key Quotes

"PM Abe is approaching his 2nd year in office and his ‘Abenomics’ program involving, at its heart, a quantitative easing program to put the size of the Federal Reserve’s to shame has resulted in USD/JPY jumping over PM Abe’s term in office from around 80.00 to 110.00 – a near 40% dollar advance versus the yen."

"This is now sparking complaint in Japan and yesterday, mid-policy meeting, Governor Kuroda was brought before the Diet to answer a DPJ question on the negative impact for the Japanese economy from yen depreciation. Japanese media and hence politicians are now focusing on this issue, as mentioned here last week, and while internal demand-fuelled inflation is better than currency devaluation-fuelled inflation, we sense these concerns are premature and more politically driven."

"In fact given what we highlighted above in regard to global commodity prices and inflation expectations in the US (it’s the same in Europe too of course), the recent bout of yen depreciation is unlikely to have any inflationary impact. USD/JPY is up around 6.3% since June – over the same period Brent & WTI crude oil prices are down around 20%. So energy disinflation is coming to Japan, even after the depreciation of the yen."

"Furthermore, while the economy is currently disappointing with the sales tax impact hitting harder than expected, there can be no doubt that ‘Abenomics’ has helped the domestic economy, in particular the labour market. The job-to-applicant ratio at 1.10 is at a level not seen since June 1992 while cash earnings annual growth has averaged 1.6% over the last
three months, the highest since 1997."

"When you take a look at the BOJ’s balance sheet relative to the other key central banks (blow), it lacks a degree of credibility for government officials to now shift rhetoric toward expressing concerns over yen weakness. We suspect the government would be a lot more concerned with a 5% appreciation of the yen from here than a 5% depreciation. It’s a case of watching what the authorities do not what they say!"

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