A weaker Japanese currency likely to match US interests

LONDON: The Japanese yen may have more room to fall against the dollar after Saturday’s Group of 20 statement failed to single out for direct criticism Japan’s expansive policies that have helped drive down the currency.
In the absence of such criticism, the yen touched a low of 94.20 to the dollar on Monday.
No doubt there will be selling of dollars to defend sizable option barriers at 94.50 and 95.00 yen, which could temper any immediate post-G20 move but barriers can be overcome.
And Friday’s meeting between US President Barack Obama and Japanese Prime Minister Shinzo Abe could militate against an immediate resumption of a slide in the yen’s value but, beyond that, the yen looks likely to weaken further.
Obama and Abe are likely to discuss Japan’s possible entry into regional free trade talks with the US.
Tokyo has been considering whether or not to join discussions on the Trans-Pacific Partnership (TPP) since 2011.
China is not earmarked as a TPP participant, which is perhaps indicative of the geopolitics of the trade talks.
That may play to Abe’s advantage.
The fact that the United States is so keen to bring Japan into the TPP sphere may mean Washington is a little more understanding about the pace and extent of yen weakening.
After all, if a weaker yen does help prompt a Japanese economic recovery, that would suit Washington, which would be happy to see a strong Japan, a US ally, as a regional counterweight to China.
Sticking to the letter of both the G7 and G20 statements, Abe is already alluding to the possibility that evolving Japanese monetary policy might indirectly have an impact on the value of the yen.
“I’m not in a position to comment on an appropriate currency level. Basically, our policies are not aimed at weakening the yen,” Abe told parliament.
“Various factors are behind exchange-rate moves. Among them, monetary policy plays a major one,” he said.
As Abe’s policies, dubbed “Abenomics,” incorporate further monetary policy expansion by the Bank of Japan, the only logical inference to be taken from his words is that the yen should weaken.
One other factor needs to be taken into account.
Abe has arguably had more impact on Japan’s economy in the last few months with his current policy stance than during the whole of his first period as prime minister in 2006-07.
The success of this bold approach is likely to encourage the government to stick with it, particularly as the cabinet is enjoying a very high domestic approval rating and Japan avoided direct criticism at the G20.
Perhaps it is no wonder some analysts are now talking about the yen weakening beyond 100 per dollar in the coming months.
— Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own.