Can the Japanese yen depreciate further?
WHILE China's equity situation, Greece's debt crisis and the plummeting of commodity currencies have dominated the recent headlines, Japan has largely been sidelined. With inflation remaining close to zero percent, its reflation efforts are lagging behind the rest of the major developed nations. This has led some economists in a Bloomberg survey to forecast further monetary easing to be conducted later this year.
Following the Bank of Japan's meeting in July, governor Haruhiko Kuroda remains convinced that current level of monetary stimulus can drive inflation to its 2 per cent target by September next year and he expects inflation to increase quickly in the coming months as he dismissed any notion of further easing but reiterated that he would not hesitate to act if needed.
However, his optimism may be short-lived as oil prices have resumed their decline due to a reduction in demand for energy brought about by the slowdown of China's economy and the global oil supply glut following the re-introduction of Iranian oil to the market. Falling oil prices are going to exert more downward pressure on consumer prices. Meanwhile, major polls showed that the approval rating for Prime Minister Shinzo Abe's cabinet is at its lowest since his return to power in December 2012.
On the other hand, Federal Reserve chair Janet Yellen is becoming more confident that the pace of recovery for the US economy could increase in the coming months and she may be inclined to start the FED's rate-hike cycle as early as September this year.
The market is likely to react positively to such sentiments which will certainly support the strength of the US Dollar.
While Mr Kuroda did trigger a temporarily sell-off in USDJPY with his comments on yen weakness last month, a combination of factors such as slowing economic activities, pressure on consumer prices due to falling oil prices, poor cabinet approval rating, and portfolio outflows by Japanese investors as a result of impending rate hike by the FED, is likely to test the central bank's resolve to maintain status quo.
