Week in FX Asia – Abenomics: investors’ reckoning fuelled by hope

At present the dollar bulls may be in control, but in yen translation, the bear has awoken from its slumber as the greenback acquaints itself once again with the coveted ¥100 handle this week. Experienced investors have taken their time revisiting this familiar territory for many reasons. If it was not for geopolitical or event risk topping the yen’s barrier list to medium-term weakness, it was probably the deathly quiet trading month of August that silenced capital markets to the point of near paralysis that pushed traders to the sidelines.

With seasonality excuses all but forgotten, both the EUR and USD bulls are now within striking distance of last May’s yen lows – the danger here is that too many market participants are holding the same position and thinking the same thing.

Investors are banking on a lot of reckoning. Is Prime Minister Shinzo Abe’s proposed consumption tax a fait accompli? Current yen pricing appears to presume so as investors gamble on Japan’s economic growth being strong enough to support the tiered tax that is to be implemented next April. Abe is expected to announce a supplementary budget when the tax is formally introduced to Japanese taxpayers on October 1.

The country’s economy is steady at the moment and raising the tax as planned from 5 per cent to 8 per cent in April 2014, and by 10 per cent in October 2015, are important steps for the Abe government to take toward sustainability as it attempts to lower Japan’s crippling national debt. Aside from 15 years of deflation, Japan’s debt is the most frightening among industrialized countries, sitting at more than twice the size of the Japanese economy.

The markets, along with the prime minister’s critics within his own party, will have to wait to see if the sales tax hikes will help to slow the country’s consumption rate. Frustrating Abe is the fact he has limited options. On the flipside, failing to increase Japan’s sales tax could lead overseas investors who have been happily benefiting from the tenets of Abenomics to unload their Japanese assets at a gradual pace.

To be clear, the potential tax increase has nil to do with deflation. Deflation remains a monetary phenomenon that Bank of Japan Governor Haruhiko Kuroda continues to wrestle. The Bank has committed to buying about 70 per cent of planned bond issuances from the world’s most heavily indebted nation in an attempt to achieve Abe’s 2 per cent inflation rate target within two years.

For now, the yen bears, dominated by Japanese pension funds, can bask in the glory of a potential repeat of yen-funded trades, supported by an easing of U.S. credit even in the face of next week’s potential Federal Open Market Committee taper “lite” announcement. Extending the 2009 (¥100.10) dollar highs is very doable medium-term so long as the mayhem in Syria continues to recede.

The weakest yen bears’ biggest short-term fear is not fundamental, nor political, but technical. The market is predominately leaning one way and that’s looking for a higher dollar. Thus, any dollar resistance will only put pressure on the weakest of the yen shorts until the market can get a clear picture from the U.S. Federal Reserve.


* EUR Euro-Zone Consumer Price Index
* GBP Consumer Price Index
* EUR German ZEW Survey (Economic Sentiment)
* USD Consumer Price Index
* USD Federal Reserve FOMC Two-day Meeting Begins
* USD Fed Pace of MBS Purchase Program
* USD Federal Open Market Committee Rate Decision
* USD Fed’s Bernanke Holds Press Conference in Washington
* NZD Gross Domestic Product
* CHF Swiss National Bank Rate Decision

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell