Week in FX Asia – USD/JPY Appreciates to 98 as Japanese Deflation Continues

Japanese Prime Minister Shinzo Abe took office in September after promising an end to deflation. He set a very aggressive target of 2% in 2 years. Abe was a vocal critic of the Bank of Japan, whose governor was up for re-election, for not doing enough and his team started making bold statements that took the market by surprise.

Fast forward to today and while the JPY has fallen as the result of the doubling of QE measures and aggressive statements deflation continues to grow. Falling prices discourage consumers as they hold off on spending and thus fail to boost economic growth. Japan’s consumer price index fell 0.9 percent making an already tough job tougher still. Kuroda has stood by his inflation target regardless of economic uncertainties domestically and abroad.

Private-sector economists forecast 1.00% by 2015/2016. There is a lot of ground between what the Bank of Japan and Kuroda have committed themselves and what the private sector expects in terms of inflation. A lot is riding on Japanese policies not only delivering results, but also being perceived as working as their goal is to get the consumers not holding back purchases as prices will go up. This of course will not happen if there is no credibility that the BoJ can be successful in reaching 2% inflation.

Analysts are not the only ones divided on the Bank of Japan’s chances of reaching the 2 percent inflation goal. Members of the Policy board are also not totally onboard with the timeline. The average forecasts showed that while the board as a whole expects 1.8% in two years the range went from 0.8% to 2.3%. That range shows some uncertainty within the BoJ that Inflation can reach a 2% level let alone 1%. Abe and Kuroda face tough times as this was their first credibility test and the market has punished the JPY. The currency was close to the 100 yen barrier and now closing the week at 98.

• Japanese Inflation Falls by 0.5% in March as BoJ Stands Firm
• Bank of Japan Reaffirms 2% Inflation Target as Data Continues to Decline
• Chinese Love Their Property
• 2% Inflation Target Made Harder as Japan Prices Fall
• Foreign Investors Start Selling Japanese Equities
• S.Korea GDP Growth at 2 Year High
• Bank of Japan to Face Inflation Showdown
• PBOC Probing Bond Market Transactions for Irregularities
• OECD Warns Japan About Structural Reforms
• S&P: Japan rating under threat
• China’s Manufacturing is Expanding at a Slower Pace
• China Ministry of Commerce Thinks Yuan Will Continue to Appreciate
• PBOC says slower growth is result of needed restructuring
• South Korea Cancels Diplomatic Trip to Japan Over Controversial Shrine Visit
• Chinese Central Banker Confident on Current Growth
• China Foreign Assets Reach 5.17 trillion dollars
• Kuroda Hails G–20 Stance as USD/JPY Nears 100
• Japanese Firms Cautious on Asset Expansions

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