Japan is in a recession,
and the Japanese yen lost 15% from the highs against the U.S. dollar. The
decline should continue this year as well. The potential target could be 104 in
the futures prices. However, the longer-term picture supports a new rise of the
Japanese yen. The Chinese economy has probably bottomed.
Bad relations with China hurting business
The decline of the yen boosted profit margins,
which rose more than 2.0%. Nonetheless, the balance of trade is in the red at -801 billion. Japanese export
volumes declined 0.4% in December after having increased 0.2% in November. Overall, they fell more than 5% in the fourth quarter
of 2012 compared to the previous quarter. World economic activity is trending
again, but Japanese activity is nonetheless contracting. Why? Japan is
massively importing fossil fuels, since all but two Japanese nuclear power
stations have been closed following the nuclear problems in Fukushima. In
addition, territorial disputes with China are hurting business. In fact,
exports to the Asian giant were almost 16% lower than in 2011, while they are slightly improving with the E.U. and the
U.S. In 2012, the Chinese GDP rose to 7.9% from 7.4%, probably marking the end
of the recession of the past two years. Short-term
expectations are for Chinese growth to stabilize around these levels, supported
by a moderate recovery in property and investment spending. Chinese exports
rose with the U.S and the E.U., but they fell about 7% with Japan.
A taskforce for the Japanese economy
In an effort to
tackle the crisis, Prime Minister Shinto Abe has decided to adopt some extreme
measures. Starting in 2014, the Bank of Japan (BoJ) will buy about JPY 13 trillion every month in
long-term securities and T-bills. The BoJ also announced last week that the supervision of macroeconomic policy
was transferred to the Council on Economic and Fiscal Policy. The
council includes ministers, business leaders, academics and the BoJ governor.
The decision, which ends the independence of the Bank of Japan, is already
producing some discrepancies from previous monetary policies. For example, in opposition to BoJ governor Shirakawa, who
fears a rise of long-term yields and a decline of Japanese stocks, the council
increased inflation target to 2% from 1%. In reality, consumer prices were
unchanged in December, with only the energy sector showing some increase due to
the usage of the expensive fossil fuels. Household costs are still moderate,
and wages might rise this year. Nevertheless, financial markets can react
faster to the new target of 2% by putting pressure on Japanese bond prices.
Longer-term cycles support
the yen
The
USD/JPY is set to decline to 104-100 (futures prices) this year. Nevertheless, the
long-term picture is still supportive for the yen against the U.S. dollar. Let
us see why. In the past, the
USD/JPY rose for 40%–50% (4–5 years) from the lows (40-85
and 63-126) before topping,
then corrected for 25%–30% (2–3 years) from the highs (84-62). The full cycle (five
waves from 1984 to 1995) expanded for 65%–75% (40-126) and lasted for 8–10
years
before turning down. The bear
cycles continued instead for 44% (126-70) and 38% (56-35). They trended for 7–11 years before bottoming (1978–1985 and 1995–2007). How does this fit in the current scenario? The USD/JPY
bottomed in 2007 at 82 and rose until 2011 (4 years) at 132 (39%). The
correction should last 2 years and expand for about 25%.
Angelo
Airaghi, www.ProfitsOn.com
The data
contained herein is believed to be drawn from reliable sources but cannot be
guaranteed, neither the information presented nor any opinion expressed
constitute a solicitation of the purchase or sale of any forex, futures or
commodity product. Those individuals acting on this information are responsible
for their own actions. Forex, futures and commodity trading may not be suitable
for all recipients of this report. The risk of loss in trading forex, futures
and options can be substantial. Each investor must consider whether this is a
suitable investment. All recommendations are subject to change at any time.
Past performance is not a guarantee of future results.
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