Yen Still Gets a Boost from Risk Aversion

Fundamentally, the currency is a weak one, and could become more so if underlying inflation moves lower.

The Japanese yen saw some weakness during March falling 300 pips against the buck and 600 against the euro. The weakness was partly attributable to a dissipation risk-off sentiment.

However despite this move lower in yen, the currency is still much stronger across the board since the BoJ introduced negative interest rates.

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The three-tiered negative rates system means that only reserves above a certain threshold held at the central bank are charged negative interest.

Clearly the market sees this as a piecemeal measure, hence the continued appreciation of the currency since its implementation.

The BoJ continues to watch core inflation closely as its primary indicator of whether the economy requires more easing. Commentary from Kuroda and his colleagues suggest that they are currently in wait-and-see mode as they assess the effects of negative interest rates.

The BoJ’s own measure of inflation excluding food and energy remained at 1.1% y/y for February, unchanged from January but down from 1.3% in December.

Further falls in this metric would certainly prompt speculation of further easing by the bank.

CPI from the statistics bureau also remains relatively stable, with Tokyo CPI excluding food and energy for March at 0.6% y/y and 0.5% for the month.

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Nationwide CPI excluding food and energy for February rose 0.8% y/y and and 0.2% for the month.

The market will continue to closely monitor core inflation measures from Japan in order to predict the BoJ’s next move.

On April 1, the BoJ released its quarterly Tankan Survey, which is an economic survey of Japanese businesses that the BoJ uses to help guide monetary policy.

The Q1 report was dismal with All-Industry Capex predicted to fall -0.9% y/y.

The Large Manufacturing Index fell to 6, below expectations of 10 and the lowest level since June 2013.

The Nikkei dropped over 650 points or 3.5% on the negative news.

The Japanese economy continues to struggle despite ultra-loose monetary policy. Fundamentally, the currency is a weak one, and could become more so if underlying inflation moves lower.

In the meantime the yen is going to respond to risk sentiment by rallying on risk aversion and falling on risk appetite.

Selling short-term bearish currencies against the yen during sessions of risk-off sentiment is the ideal way to play the yen for now.

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