(12 DECEMBER 2017)DAILY MARKET BRIEF 2:Japan: weak inflation to weigh on the yen

The USDJPY has been increasing since the last week of November and is now monitoring stronger levels below 114 yen for one single dollar note. The yen is getting weaker but remains way too strong for the Bank of Japan to start normalizing its monetary policy. The central bank is in all-in mode and the effect on the yen is still mixed. One very important thing needs to be said. It is that the day when the BoJ will even hint at a possible normalization of the monetary policy, the yen will likely spike disrupting all the strategy from the Japanese Central Bank.

We then believe that, the BoJ will remain in a “dovish mode” until inflation will have killed part of its debt. This can take years even decades. Hence, the BoJ is condemned to follow the path of the Fed or the ECB. Inflation is what BoJ officials are running for. Shinzo Habe recently declared that wages increase of 3% in order to boost consumer prices which in the end will have a positive impact on the debt. BoJ knows that inflation is now mandatory to kill the massive debt. It is still a long way to go. And the BoJ knows looks towards the US hoping for several Fed rate hike next years.

By Yann Quelenn