0
58
Taisuke Tanaka, Research Analyst at Deutsche Bank, suggests that the
rising current account surplus of Japan can contribute to capping
USD/JPY upcycle in 2016.
Key Quotes
“Japan’s C/A surplus has been expanding. While export growth is sluggish despite a weaker JPY, softer crude oil prices have reduced the value of imports and helped the trade balance turn to surplus. An increase in foreign visitors has buoyed the travel account surplus, and repatriation of overseas profits by Japanese companies has contributed to strong growth in the income account surplus, which in turn has supported growth in the C/A surplus.”
“A C/A surplus does not imply immediate JPY appreciation. In the past, the JPY has tended to start appreciating on average 1.5 years after the C/A surplus expanded. We see volume pressure in supply-demand balance bringing about price adjustments here. At the same time, the C/A has tended to change with about a two-year lag to the JPY rate (Figures 3, 4). We think changes in price (=exchange rate) likely bring about volume adjustments. A causal relationship whereby prices bring about volume adjustments and volume brings about price adjustments makes sense. Since the onset of the Abe market, JPY depreciation has steadily indicated an increase in the C/A surplus. In combination with cyclical factors, this increase in the C/A surplus suggests the USD/JPY uptrend may end soon.”
“However, we think the economic cycle affects both the C/A and the JPY with a time lag, and estimate that as a result the time lag correlation between the C/A and the JPY rate emerge. The main factor moving the JPY rate in line with the economic cycle is changes in interest rates reflecting the economic cycle.”
“In the current cycle, US interest rates are poised to rise, and this will likely continue to support the USD/JPY. We thus see Japan's C/A surplus less as a possible factor for turning the USD/JPY's upcycle downward in 2016, and rather as a potential factor for capping upside.”
Key Quotes
“Japan’s C/A surplus has been expanding. While export growth is sluggish despite a weaker JPY, softer crude oil prices have reduced the value of imports and helped the trade balance turn to surplus. An increase in foreign visitors has buoyed the travel account surplus, and repatriation of overseas profits by Japanese companies has contributed to strong growth in the income account surplus, which in turn has supported growth in the C/A surplus.”
“A C/A surplus does not imply immediate JPY appreciation. In the past, the JPY has tended to start appreciating on average 1.5 years after the C/A surplus expanded. We see volume pressure in supply-demand balance bringing about price adjustments here. At the same time, the C/A has tended to change with about a two-year lag to the JPY rate (Figures 3, 4). We think changes in price (=exchange rate) likely bring about volume adjustments. A causal relationship whereby prices bring about volume adjustments and volume brings about price adjustments makes sense. Since the onset of the Abe market, JPY depreciation has steadily indicated an increase in the C/A surplus. In combination with cyclical factors, this increase in the C/A surplus suggests the USD/JPY uptrend may end soon.”
“However, we think the economic cycle affects both the C/A and the JPY with a time lag, and estimate that as a result the time lag correlation between the C/A and the JPY rate emerge. The main factor moving the JPY rate in line with the economic cycle is changes in interest rates reflecting the economic cycle.”
“In the current cycle, US interest rates are poised to rise, and this will likely continue to support the USD/JPY. We thus see Japan's C/A surplus less as a possible factor for turning the USD/JPY's upcycle downward in 2016, and rather as a potential factor for capping upside.”
