Japanese Yen Outlook (1 – 3 Months)– Grinding JPY weakness

USD/JPY finally broke higher in late-May, with the rise through 124 talking JPY to its weakest since 2002. It is hard to tie the move to any particular domestic news flow. The BoJ left policy unchanged at the late-April meeting and there is little realistic prospect of more easing now until the next forecast update in October. Domestic data continue to point to little in the way of positive economic dividends from a weaker JPY. 

Although headline Q1 GDP was better than expected (0.6% q/q; consensus 0.4%), the detail was poor and the net trade contribution was negative (-0.2% point contribution), despite a huge fall in JPY in the previous six months. Moreover, as the consumption tax hike dropped out of the annual inflation rate, CPI inflation fell back to just 0.3% y/y (ex-fresh food) in April and there is still no evidence of second round effects from previous JPY weakness or any evidence of rising inflation expectations amongst consumers, notes RBC Capital Markets. 

Despite the lack of evidence that a falling JPY is achieving much, and the absence of a domestic policy driver, RBC Capital Markets assumes USD/JPY keeps grinding higher in the short-term on the basis of persistent JPY selling flow. The main source of this flow is the public sector (GPIF and others) and the main destination is foreign equities. In recent months, much of this JPY selling was absorbed by an unwind of leveraged JPY shorts, but with positioning now much closer to neutral, the risk of ongoing capital outflows driving JPY down is much higher.