USD/JPY’s 87% Record: An August Fall

August is the month when USD/JPY fell in 13 of the last 15 years (87%), with 2006 and 2008 being the only exceptions since 1998. Repatriation of August coupon payments from US treasury bonds by Japanese investors has long been attributed to the yen’s summer gains. Yet, whether Japanese investors plan on hedging their coupon payments or sustain them ahead of the end of the first half of the first year, they may not ignore the yields considerations. Aside from US treasuries, whose 10-year yields remain the highest in the G7, gilt yields could become a serious contender for the next carry trade as Carney’s forward guidance risks being knocked out by inflationary.

Last night’s preliminary Q2 GDP figures grew by an annualized 2.6% q/q, disappointed consensus expecting a 3.6% rise. For Japan to post three consecutive quarterly gains in GDP and to exceed growth rates in the US, UK and Germany is a ringing endorsement for PM Abe’s policies. But the fiscal challenges must be dealt with.

Fiscal Forward Guidance?

Considering Japan’s national debt surpassing the one quadrillion yen mark (twice the size of the economy), it is time for PM Abe to focus more on fiscal policy and deliver an intelligently announced tightening. Last year, Japan’s 3 main parties agreed on raising consumption tax to 8% from 5% next April. The implicit guidance for such fiscal tightening is for the government to demonstrate a notable economic improvement while preserving the path out of deflation. The latest GDP figures fulfill those requirements. But will they continue into the 2nd half of the fiscal year and into next winter?

Abe’s government is rumoured to offer fiscal sweeteners in the form of corporate tax cuts and boosting investment spending as a way to offset any growth repercussions from the sales tax. Such a corporate-based stimulus package would follow the BoJ’s shock-&-awe monetary stimulus, part of which seen as a stimulus package for exporters via the falling yen.

Abe must avoid the mistake of 1997, when the Hashimoto government suffocated a fragile recovery with a misguided 5% sales tax. Aided by a stimulative BoJ and a conditional pact based on continued growth, Mr. Abe has sufficient time to decide enacting whatever will be agreed upon this year. Meanwhile, the credit agencies shall closely watch the outcome. The last credit rating action was in May of last year when Fitch downgraded Japan’s rating to A+ from AA. Ratings from S&P and Moody’s remain one notch above at AA and Aa3 respectively.

The long term upward path of USDJPY and most yen crosses is far from concluded. But a retest of 94.00 is in play in the medium term before the recovery is in place.
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