Japanese yen – time to consolidate the gains?

By Michael Stanes, Investment Director, Heartwood Investment Management

The Japanese yen is trading at multi-year lows versus the US dollar and sterling. Its depreciation has been more pronounced over the past year, spurred by the Bank of Japan’s (BoJ) additional stimulus in October 2014, when the central bank surprised the market by announcing an expansion of its asset purchase programme to an annual pace of 80 trillion yen.

BoJ policymakers have been explicit in their intentions to meet an inflation target of 2% and consistently bullish in their outlook. The market has been sceptical for good reasons. Japan’s economy has struggled to make meaningful improvements since it bounced back from recession late last year, leading the BoJ to push back the timeframe of meeting its inflation target from the fiscal year 2015 to 2016.

As the impact of last year’s VAT hike has diminished, core inflation (excluding fresh food) remains barely above zero (0.1% year-on-year in June). Over the past few months, the BoJ has towed the same line as the Federal Reserve and the Bank of England, anticipating that the effects of lower energy prices would be transitory and that inflation would return to a normal trend over the longer term.

However, the BoJ has evolved its view further to consider that the energy price effect cannot solely be responsible for lowering inflation. It has announced a new measure of inflation, which strips out imputed rent, as another reference point.

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