JPY: Abe plays up global downside risks – MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that the Japan’s nationwide inflation data for April will have come as relief with the nationwide core annual rate remaining at -0.3% in contrast to the expected fall to -0.4%.

Key Quotes

“The ex-food and energy level remained at +0.7%. The possibility of a second rate increase in the US and crude oil prices rising by close to 90% from the low in February will both help to alleviate some of the pressure on the BOJ to act. But worryingly, the BOJ’s measure of core-core annual CPI fell from 1.1% in March to 0.9% in April, the first time the reading has been below the 1.0% level since July of last year.

However, PM Abe appears determined to play up downside risks to the global economy. Somewhat surprisingly (and we suggest inaccurately) PM Abe likened current global financial market conditions as akin to conditions prior to the collapse of Lehman Brothers in 2008. That assessment was not shared by IMF Managing Director Lagarde and no doubt other G-7 leaders were also sceptical of such a view.

In one sense that’s a dangerous comparison to make given it was the period in which USD/JPY plunged taking the yen to extreme over-valued levels. But in another sense that might be exactly why he made the comparison – with the message being, we will not allow the yen to repeat the move that took place between 2007 and 2010. Making such a comment also provides justification for Japan to take growth-supportive measures. Clearly PM Abe’s attempts to build a G-7 consensus around coordinated action were not fruitful but that doesn’t mean Japan will not go it alone. A fiscal stimulus package and a postponement of the sales tax increase, due in April next year, both seem likely. Whether that action will be enough to revive confidence in ‘Abenomics’ and help fuel renewed yen weakness is certainly more debatable.

Still, broader market conditions certainly are helping for now to curtail appetite for yen buying and the more cautious forward guidance as we approach the second Fed rate hike certainly offers hope that market turmoil like in January and February will not be repeated, which will certainly be more supportive for USD/JPY.