Macroscope | Why a weaker Japanese yen might just suit Beijing at the moment
A sustained downtrend in the Japanese currency versus the US dollar will help shield China from critics who harp on about yuan weakness
What goes up must come down. Even with currencies. The Japanese yen, which has risen appreciably against the US dollar over 2016, may be on the cusp of turning lower. A weaker yen would in turn help Beijing maintain the yuan’s stability versus a basket of currencies given the current strength of the dollar versus China’s own currency.
Having begun 2016 at 120 yen to the US dollar, the Japanese currency had risen to just below 104 to the greenback at the end of last week. Looking ahead, US firm Morgan Stanley has mooted the idea that the yen could fall materially versus the dollar by the second quarter of 2017.
“Yield differentials have turned in favour of the US dollar and with US economic data coming on the strong side … the [United States] seems to have to choose between a higher US dollar or higher bond yields,” Morgan Stanley wrote on Friday.
The stars may be aligning for a renewed slide in the yen against the dollar. That might just suit Beijing at the moment.
More broad-based dollar strength would by definition imply a weaker yen versus the dollar.
But the yen might still fall versus the dollar if the outcome was higher US bond yields that attracted Japanese investors to dollar-denominated US Treasuries in preference to the derisory returns offered by Japanese Government Bonds (JGBs).
Japan’s monetary policy settings currently seek to keep the yield on 10-year JGBs near zero.
Of course, very low or negative Japanese interest rates, especially when there is no end in sight to the Bank of Japan’s ultra-accommodative monetary policy settings, might invite renewed demand for investments in yen-denominated Japanese equities.
Mitsubishi UFJ Morgan Stanley Securities (MUMSS) noted on Thursday that non-Japanese investors were “net sellers of Japanese equities to the tune of about 6.2 trillion yen during January to September 2016,” but might now be coming back.