AUD/JPY: BOJ Gov Shirakawa’s Early Exit Stokes Further Yen Weakness

Despite a disappointing Retail Sales report in December, the Australian dollar is believed to sustain its advance today on Yen weakness as markets bet that a more dovish Bank of Japan governor will soon be installed to push through with aggressive easing measures. Such views escalated after current BOJ Governor Masaaki Shirakawa announced he plans to step down on March 19, three weeks before his term ends.

Australian retail sales dipped for a third consecutive month in December in a rare run of weakness which analysts say strengthened the case for another interest rate cut. The Australian Bureau of Statistics reported that retail sales fell 0.2 percent in December to A$21.42 Billion, considerably failing to meet estimates of a 0.3 percent rise. Highlighting the bleakness of the data, the last time spending dropped for three months in a row was in late 1999 to early 2000. A weaker employment outlook likely contributed to the decline in sales, with a report tomorrow expected to show the jobless rate edged up in January. The Reserve Bank of Australia held its cash rate on hold at 3 percent yesterday, saying there were signs its past easing measures were starting to work. Nevertheless, it also left the door open for further easing should the economy disappoint in the coming months.

Despite this outlook, Yen weakness is apt to drive the pair higher as the markets are bracing for more aggressive easing from the BOJ. Speaking to reporters yesterday, BOJ Governor Shirakawa said he would step down together with his two deputies on March 19 instead of the scheduled April 8, possibly accelerating a leadership transition that could aid Prime Minister Shinzo Abe’s campaign for stronger measures. Abe has put the central bank under relentless pressure to do more to lift the economy and has stressed he wants someone in the job who will be bolder than the outgoing leader in loosening monetary policy. News of Shirakawa’s earlier than expected exit is seen to weigh on the Yen further on expectations that under a new boos, the BOJ would act sooner and do more to help the economy. On views that further easing steps will be introduced earlier than previously anticipated, the Yen is apt to decline, warranting a long position for the AUD/JPY trades today.