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JPY: Current account surplus will protect yen depreciation - MUFG

FXStreet (Delhi) – Derek Halpenny, European Head of GMR at MUFG, forecasts for the Japanese yen in 2016 is against consensus with USD/JPY projected to be on a soft depreciation path to 118.00 by Q3 of next year.

Key Quotes

“There are a number of factors we assume to explain that but one key factor is Japan’s rapidly expanding current account surplus.”

“Data today revealed a current account surplus that, although smaller than expected, still showed a rapid turnaround in the external position compared to 2014. The September surplus totalled JPY 1,468.4bn, down from JPY 1,653.1bn. But in the year to September, Japan’s current account surplus totalled JPY 13,112bn (USD 107bn) compared to just JPY 1,133bn (USD 9bn) in the same period of 2014. That’s a surplus that is nearly 12 times as large as last year.”

“The rapid expansion of the surplus means it takes a larger amount of exported capital to weaken the yen – and when the yen is currently as weak as it is, that may prove more difficult from here. At current nominal GDP levels, the surplus has expanded in the space of a year from close to 0% of GDP to 2.6%.”

“Of course what will become more crucial from here is whether increased risk appetite from Japanese households will act to expand the capital being exported from Japan. As the FT points out today, the signs are good that ‘Abenomics’ has at least increased retail risk appetite with households’ large cash deposits as a percentage of total financial assets at the lowest level since before the financial crisis.”

“However, that in itself might not be enough to offset a current account heading for over 3.0% of GDP. The great diversification flows from GPIF look set to diminish from here and the Japan Post diversification into riskier assets will probably not be on the same scale as GPIF given the shorter duration of liabilities compared to GPIF. Yen depreciation from here is set to be relatively limited, especially if financial market volatility were to pick up.”

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