Between the Bank of Japan’s monetary policy meeting and the G20 meeting on Thursday and Friday, this is a big week for USD/JPY. In terms of currency flows, USD/JPY pulled back at the end of last week, making some traders worried about a deeper sell-off in the currency. There’s no question that USD/JPY enjoyed a fantastic rally – the currency pair appreciated more than 17% over the past 3 months, taking all of the yen crosses higher with it. It is also hard to argue that such a strong move over a short period of time does not constitute “excessive volatility” and it is this fear of criticism on the global stage that has led the Japanese to publicly admit that the sell-off in the Yen may have gotten ahead of itself. So how serious of a threat to the Yen is this week’s BoJ and G20 meetings?
G20 – Watch Exchange Rate Language
While this week’s G20 meeting is important and the recent price action of the Japanese Yen subjects the country to criticism, the Japanese will undoubtedly argue that Yen weakness is a function of their efforts to stimulate growth and pull the economy out of 2 decades of stagnation. They will also retort by saying they publicly criticized the sell-off in the Yen and in doing so are actively trying to stop the one-way slide. For the time being, we believe that the G20 will buy these arguments because Japan is not the only country guilty of trying to debase its currency. China has been doing it for decades and the current monetary policies of most central banks are also consistent with weaker currencies. There may be off the cuff comments but we don’t expect any significant changes to the currency language in the G20 communiqué, which means that the impact on USD/JPY should be limited. Yet this does not rule out the possibility of further profit taking in USD/JPY ahead this week’s meeting. Even if there is no profit taking, we don’t expect USD/JPY to rise to a fresh 2.5 year high until the meeting has passed.
Investors will be comparing the currency language of this month’s communiqué with the one in November that said:
November 4-5, 2012 G20 Communique
We reiterate our commitments to move more rapidly toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals, avoid persistent exchange rate misalignments and refrain from competitive devaluation of currencies; to boost domestic sources of growth in surplus economies, and boost national savings in deficit economies. We reiterate that excess volatility of financial flows and disorderly movements in exchange rates have adverse implications for economic and financial stability. We commit to the implementation of ambitious structural reforms aimed at promoting output and employment. We have also made progress in strengthening our Accountability Assessment framework by agreeing on a set of measures to inform our analysis of our fiscal, monetary and exchange rate policies.
However if the G20 hardens their stance on currency manipulation, USD/JPY would fall and fall quickly.
Bank of Japan – No Change for BoJ at Shirakawa’s Last Meeting
Having just announced an open ended asset purchase program last month, the Bank of Japan is not expected to take any fresh actions on monetary policy especially since Shirakawa will be focused on winding down his term and preparing for a handover to the new central bank governor. When they last met, the BoJ also said it wanted to space out their extraordinary easing measures and with some signs of improvement in Japanese data along with additional weakness in the Yen since the last meeting, the economy can afford to wait for more aggressive measures in April. It is widely believed that the new BoJ Governor will make dramatic changes to monetary policy when he takes office that will lead to fresh Yen weakness. Shirakawa’s big announcement last month was aimed at monetary policy in 2014 and a lot still needs to be done between now and then.
So for the Japanese Yen, we don’t expect the BoJ meeting to pose any threat to the USD/JPY rally. However with the G20 meeting on the calendar, we also don’t expect Japanese officials to say anything that could help drive the currency pair higher. In fact, the Yen could consolidate and maybe see some mild profit taking up until Prime Minister Abe announces his 3 candidates for BoJ Governor, at which time speculation about how dovish these candidates are could drive USD/JPY higher once again. We expect this announcement to come after Abe’s visit the U.S. from February 20th to the 24th.