CBA: Here's why a double-dose of stimulus won't be enough to weaken the Japanese yen


As a well-known indicator of broader investor sentiment, the Australian dollar has risen sharply against the Japanese yen over the past two weeks, surging close to 10% from the depths struck in the immediate aftermath of the UK Brexit referendum.

Aussie-yen, as it is known in financial markets, has been caught up in the same frenzy that has gripped many other risk assets of late: the prospect of ever larger, more inventive, forms of central bank monetary policy stimulus, along with a dash of fiscal spending being delivered by the Japanese government.

While there are many intertwining influences, in this instance, the chief catalyst behind the AUD/JPY move is the hope that the Bank of Japan will step up to the stimulus plate next week, delivering a policy “bazooka” rather than a proverbial “pea-shooter”.

With hopes already so high, there are an increasing number of analysts who are warning that markets are setting themselves up for disappointment. Given the move in risk assets seen already, based on the presumption that additional stimulus will be delivered, there’s little room for surprise, unless it’s to the downside.

AUD/JPY 4-Hour Chart

Joseph Capurso, senior currency strategist at the Commonwealth Bank, is one analyst who believes that it will be hard for the AUD/JPY to push significantly higher over the near-term, suggesting that it will “soon re-weaken even if the Bank of Japan announce ambitious policy easing on 29 July”.

Capurso suggests that there are three possible scenarios that will eventuate from the BOJ meeting, none of which include the idea floated by some analysts that the bank may introduce so-called “helicopter money”, a broad-based tax cut or government spending increase that is financed directly by the BOJ.

Here are the three scenarios that he thinks will play out, along with the probability of each occurring.

  • If the BOJ does not announce more policy easing on 29 July, we expect AUD/JPY to slump back to near its pre-election level of 76.0. We ascribe a 30% chance to this scenario.
  • If the BOJ cuts the policy interest rate from -0.1% to -0.3% (our baseline view) or increases its asset purchases by ¥5 trillion to ¥85 trillion per year, we expect AUD/JPY to lift to 81.11 (100 day moving average). We ascribe a 60% chance to this scenario.
  • If the BOJ is more ambitious — a cut to the policy interest rate from -0.1% to -0.5% and/or an increase in the rate of the BOJ’s asset purchases of ¥10 trillion to ¥90 trillion per year — we expect AUD/JPY to lift to 83.22 (200 day moving average). We ascribe a 10% chance to this scenario.
  • Under the last two scenarios, Capurso suggests that any gains in AUD/JPY will be temporary, forecasting that he does not expect it to “continue appreciating one week after the BOJ’s meeting”.

    “BOJ policy easing is not the main driver of the JPY. Instead, in our view, the main driver of the JPY is Japan’s current account surplus,” he says, adding that further easing will not “reduce the current account surplus materially because we do not expect it to change Japan’s private corporate investment-saving balance.”

    He also suggests that the prospect of a large fiscal stimulus package introduced by the Japanese government — reported by Reuters on Thursday to be as large as $US190 billion — will do little to alter the nation’s current account balance.

    “Most of an estimated ¥20 trillion stimulus package will be allocated to loans and infrastructure spending in Japan and overseas. If this news report is delivered, we do not expect it will substantially eat into Japan’s current account surplus. Therefore, it will have little sustained effect on the JPY,” he says.

    Even with the prospect of additional fiscal and monetary stimulus, the CBA forecasts that the AUD/JPY will finish the September quarter buying 74.88, more than 6.5% below its present level of 80.22. Given it’s relationship to other risk assets, it’s not unreasonable to suggest that a reversal in other risk assets, such as stocks, could also be on the cards if the CBA is right.

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