Neil Davies, Head of Trading at PlutusFX, takes a look at the Yen
USD/JPY currently stands at 114.7, which is close to a 9% move over just the last two weeks, with the physiological and technical level of 110 being smashed through in one hit at the end of October. The big move commenced with the BoJ announcing a massive boost to its QE programme, with over $700bn a year in government bonds to be purchased. Shinzo Abe was well known for his commitment to economic stimulus policies, but clearly this move wasn’t priced in by the markets.
Last year Abenomics was in the headlines with its three pronged attack of increasing government spending, printing Yen to create inflation and implementing structural reforms to improve economic efficiency. However, with a world leading public debt of 2.4 times GDP the government have also imposed an 8% sales tax, which may soon to be 10%, in order to help manage the debt.
There really is only one way out of the debt crises, devalue it by getting inflation up. To date though, even the miserly inflation target of 2% by 2015 seems someway off, with the rate hitting a peak of late of only 1.5%. The problem is, the Japanese just don’t like to spend. They have been so used to saving for decades.
Of the three pronged attack, the first two parts are relatively easy and that’s what has been achieved, just print and spend. Economic reform has not been so easy to implement. All these though are minor in the long term as Japan will struggle to see anything other than economic decline due to its consistency dwindling population. Japan is already experiencing a shortage of labour and that’s with a current ratio of three working people supporting each retiree. By 2050 that ratio will be one to one.
The other option for Abenomics, and the most controversial one, is to open up the country’s tight immigration controls. This is a political minefield, with only 2% of the population being foreign and opinion polls showing consistently that the Japanese are against it. There are ‘back door’ policies that get around the controls in the short term, such as those imposed to import foreign workers for Tokyo 2020 construction, but with a 30Million lower population expected by mid-century, this is an issue that printing some extra Yen won’t solve.