Tensions in the Middle East have not reached boiling
point by any means and this has kept any traditional yen buying down. On the
other hand, these simmers have certainly persisted with President Obama
recently announcing the commencement of US air strikes on Islamic State
targets in Syria, to add to efforts already in existence within northern Iraq.
Yen buying is said to have been prevalent, and
has been twinned with an increasingly hawkish view on the US dollar that has
pushed USD/JPY to its current level. The dollar index is pushing through the
85.0 level with USD advancing against counterparties across the board. Where
EUR, GBP and the antipodean currencies have stumbled, USD has continued its
march and it is this combination that has led USD/JPY to rise and keep rising.
Market reaction to JPY weakness
Many market participants commented that once the pair
broke out of the 101.0 to 104.0 range that it sat within for the majority of
the year the move would be significant and this has proved to be the case. In
the currency options market, the demand for topside strikes during this
range-bound trading was a prominent indicator of the direction of such a
breakout before it began to occur in August.
Within Japan the announcement from the largest
public pension fund in the world on July 8th that it would increase its
allocation in domestic stocks from 12% to 20% gave a boost to small businesses
across the nation, weakening the yen in a favourable fashion. USD/JPY at the time
moved to what was then a high of 102.43 upon this news from the Government
Pension Investment Fund.
Recent news that Japan's Government Pension Fund will increase its allocation into domestic stocks has helped ease the yen, but some investors had hoped the fund would inject more money into Japan's stock market. Photo: Shutterstock
The precise makeup of the new portfolio is
still to be announced but when put into force, it may serve to boost
USD/JPY further. Moreover, the negative impact of the controversial sales tax hike was
noted in the minutes from the Bank of Japan’s July meeting as likely to begin
to decrease, and indeed this has taken place. These significant adaptations
occurring in Tokyo set the stage for the USD/JPY rise, and needed only the
recent push from the dollar to make that happen.
A sense of halt was temporarily given this week
to the advancement of the pair after Japanese Prime Minister Shinzo Abe
commented on the pressure that the consistent weakening of JPY may have on
economies in the wider and smaller regions of Japan. This came after comments from
ministers in Tokyo which precluded those from Abe, but may well be a mark of
concern about the dramatic pace of the move as opposed to the direction of it.
Is Abenomics working?
The question of whether ‘Abenomics’ is working
remains to be seen, but steps to boost growth are now becoming more visible.
The consumption tax across Japan is set to hit the 10% target in 2015 whilst
unemployment stands at an increasingly healthy 3.8%. Despite the improved
unemployment rate, a contraction in year-on-year growth of 1.8% in Japan was reported in the second quarter of the year. This
figure results from the impact of the economic response to the tax hike from 5%
to 8%, and with a deflation gap narrowing, Abe and his monetary policy committee
may decide to make a more incremental increase in the sales tax from 8% to 10%.
As fundamental data shows firm growth in the US
and rate hikes from the Federal Reserve appear increasingly imminent, there is
unlikely to be a change in direction for USD/JPY, although a sense of
consolidation may occur for the pair. It remains to be seen just quite
how the situation in Syria and Iraq will develop, but the advancing problem of
the Islamic State is unlikely to cease and this may be a factor that could
potentially move USD/JPY towards the downside rather than towards the 110.0