Three Reasons Why Yen Bears Could Get Some Cheer by Next Friday

(Bloomberg) -- Japan’s currency has had a good year so far, boosted in part by speculation the country’s central bank will start to roll back the mega-stimulus it unleashed five years ago.

For yen bears insisting it’s far too early for the Bank of Japan to start fine tuning its monetary easing, there could be some encouragement in coming days. Yujiro Goto, a currency strategist at Nomura Holdings Inc. in London, calls it a “crucial two weeks for BOJ watching.”

Three Reasons Why Yen Bears Could Get Some Cheer by Next Friday

Here are the events that could swing opinions, per a note Goto wrote to clients April 13:

  • The summit between Prime Minister Shinzo Abe and U.S. President Donald Trump, running April 17-18. Key here is the extent to which Trump pushes for trade talks with Japan. If Japan avoids going down the path toward a bilateral free trade agreement, there should be less possibility of pressure from the U.S. against currency depreciation.
  • The BOJ’s semiannual Financial System Report comes April 19. This is the first one since Governor Haruhiko Kuroda in November raised the theory that excessively low interest rates could be counterproductive, by harming the banking industry -- comments that excited yen bulls, and bond traders. A clean bill-of-health for the banks in this report will lower the risk of BOJ policy tweaks, Goto says.
  • Last up: the April 27 monetary-policy decision. Taking for granted there’ll be no shift in policy, the focus here is on updated BOJ economic projections, including new ones for the 2020 fiscal year. Less-optimistic -- and in all probability more realistic -- forecasts for inflation would show the BOJ continuing to miss its 2 percent target. “That would be a clearer signal that the exit is far away,” Goto says.

There’s one other dynamic traders will want to watch: Japanese politics.

After a raft of scandals, support for Abe’s cabinet is dropping, five months before the ruling party decides whether to give him another three-year term as its leader. The recent confirmation of Kuroda to a new term as governor, along with the emplacement of two deputies backing his stimulus, means BOJ policy seems set. But Abe has been a grand champion of yen weakness, and there’s no guarantee his successor will have quite the same commitment.

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