USD/JPY To Rise Above 120 N-Term As BoJ Leads The Way On QE - Goldman Sachs

Why has ECB implementation of QE lagged behind the BoJ? Our view is that the ECB suffers from “financial dominance,” whereby vested interests in the core of the Euro zone, Germany in particular, are preventing aggressive QE implementation that challenges the business model of the financial sector. These vested interests, incidentally, are similar in Germany and Japan. Both have structural current account surpluses, i.e. excess saving, with financial sectors that recycle that saving.

In Japan, the BoJ has decided to ignore those vested interests and exhibits “monetary dominance,” i.e. the wholehearted pursuit of its inflation target, as is apparent from the outsized flattening and stability of the JGB yield curve.

In Europe, the combination of “financial dominance” and a focus on growth (rather than still sizeable output gaps) has caused QE implementation to lag (Exhibit 5). We are hopeful that coming ECB meetings will resolve this tension.

In the meantime, we push back on the gathering consensus that the Yen weakening trend is over.

We see $/JPY above 120 in the near term as China devaluation fears abate and 130 by the end of 2016.

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