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Japan: Strengthening of the Yen amid volatile markets - Nomura

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 20, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Research Team at Nomura, presents their view of the Japanese economy amid volatile market conditions and the economic impact of changes in exchange rates, crude oil prices, and share prices.

    Key Quotes

    “We see strengthening of the yen and a fall in share prices as likely to have a negative impact on the outlook for Japan's GDP and a fall in crude oil prices as likely to have a positive impact. Our estimates, based partly on a Cabinet Office economic model, indicate that if markets remain close to their current levels, these positive and negative impacts are likely to be finely balanced. We think the overall impact on Japanese GDP growth of the dramatic market changes is likely to be limited because the positive and negative impacts will largely cancel each other out.

    Impact on monetary policy

    The BOJ has made clear its view that the negative impact on inflation of a fall in crude oil prices does not indicate a change in the underlying trend in prices. However, the core inflation rate could remain negative for a considerable time if the yen strengthens at the same time as crude oil prices fall and there is still a question mark over how long the BOJ can allow this situation to continue.

    In addition, a strong yen is quite likely to overturn the assumption of an increase in domestic production by Japanese manufacturers, which has been one of the key results of Abenomics. If USD/JPY falls well below 115 and approaches 110, a decision to implement further monetary easing at the monetary policy meeting at end-January will look more likely.

    If the BOJ does decide to expand its monetary easing program, we think its options will include (1) increasing its long-term JGB purchases, (2) increasing its equity ETF purchases, (3) increasing its Japanese REIT purchases, (4) increasing its local government bond purchases, (5) increasing its corporate bond purchases, and (6) lowering the interest rate on excess reserve balances.”
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