Week In FX Asia: Yen Weakness Remains

Asian markets are heading into their weekend still coming to terms with the Fed’s surprise “no” taper announcement this week. Emerging market currencies have received some of the largest support while the dollar has returned to familiar territory just shy of the ¥100 psychological barrier.

The Japanese press is reporting that Japan’s PM Abe is said to have decided to proceed with raising consumption tax from 5% to 8% in April as previously scheduled. The government is expected to implement ¥1.4T worth of corporate tax cuts as part of a previously announced stimulus plan and consumption tax hike.

A drastic tax cut is deemed necessary. By lowering the country’s high effective corporate tax rate (38.01%) down to a level on par with other nations, PM Abe hopes to improve the financial strength of companies. These companies are then expected to increase wages and salaries to help improve consumption.

Finance Minister Aso remains reluctant to approve corporate tax cut as proposed by Abe. He is concerned that ending reconstruction tax on businesses “could rouse discontent in disaster-hit areas and derail any efforts to half the nation’s primary balance deficit in fiscal 2015.”

However, Abe plans to make a final decision on October 1st. The government is currently trying to agree on a +¥5t economic package to prevent the tax hike from causing the Japanese economy to falter.

The benefits of Abenomics weak currency policy are already been seen. Japan’s trade deficit has eased and exports are growing the most since 2010. Japan’s trade deficit eased to -¥960.3b in August while exports grew +14.7%, yoy in the same month.

Much has been made about the damage a planned sales tax would do to Japanese confidence and growth. The nation is forecasted to grow +2.8% in the fiscal year to March 2014. While growth is expected to slow to +0.7% in the following fiscal year as the first sales tax reduces consumer spending.

The USD/JPY rally since Thursday’s FOMC decision is being blamed on the markets rush to sell yen to fund ‘carry.’ All it has basically done is increase the already large short yen spec positions. The pair is currently straddling pre-FOMC levels. Due to the depth of yen shorts across the board further weakness will be a “grind”. On the flipside, the lack of more dollar buyers could weaken support and squeeze some weaker yen shorts out of their current positions.

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