Forex Flash: Less dovish FOMC minutes to support USD/JPY test of 100 - BTMU

Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ notes that the Yen continues to remain on the defensive overnight with USD/JPY still hovering below the psychologically significant 100.00 level.

He feels that the impact of the BoJ’s shift to more aggressive monetary easing combined with the easing of more acute euro-zone sovereign debt tensions have had a significant negative impact upon the yen. He adds that the nominal trade-weighted yen has declined by almost 25% since July of last year reversing around two thirds of its previous gains following the global financial crisis since 2007. Hardman writes, “When taking account of the relative inflation trends, the BoJ’s real trade-weighted yen index has now more than fully reversed its pre-financial crisis gains reaching its weakest level since the peak of the yen funded carry trade boosting the external competitiveness of Japan.” Further, he adds that the yen has moved deeper into undervalued territory following the BoJ policy announcement last week, which raises the question of how much weaker could it become?

In more recent history he has found that USD/JPY overvaluation in our PPP model has reached extreme levels of around 20.0% in 1990, 1998, 2002, and 2007. At present that would equate to USD/JPY reaching around 110.00 although it could adjust higher still if the BoJ was successful in generating materially higher inflation in Japan further ahead. He finishes by writing, “We anticipate that USD/JPY will move towards these extreme levels over the next twelve months. Yen weakness is being driven by expectations that BoJ policy will drive portfolio rebalancing by Japanese investors towards riskier assets. So far there is little evidence that Japanese investors are increasing exposure to foreign assets with net sales of foreign bonds totaling JPY1.06 trillion in the week that ended the 5th April. It marked the fourth consecutive month of net selling.”