USDJPY: Brexit reversal will curtail yen selling from here - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the USD/JPY rate has dropped modestly with newswires reporting the denial from Chief Cabinet Secretary Suga that Japan is about to embark on a policy of ‘helicopter money’.

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“While the issue of economic policy in the wake of PM Abe’s success in the Upper House elections is an important one, the lack of further yen selling so far today is perhaps more a reflection of the simple fact that the USD/JPY drop post-Brexit has now been fully reversed. The driver of markets this week has been the widespread reversal of the post-Brexit trade as investors’ fears over contagion from the referendum result recede further. The Topix Index has also fully retraced the post-Brexit drop.

That is not to suggest that the issue of ‘helicopter money’ should be completely ignored either. We have often argued that Japan is by far the closest a country is to running a policy of ‘helicopter money’ given the stance of fiscal policy, the level of total debt and the stance of monetary policy. A look at Japan’s budget deficit position relative to other countries where QE is running tells you something different is going on in Japan. The US budget deficit post-GFC has gone from 10% of GDP to under 2.5%. In the euro-zone it has gone from 6.3% to 2.1% and in the UK the deficit has declined from 10.7% to 4.4%. But in Japan, the budget deficit has only diminished modestly from 8.8% to 6.7%.

While Chief Cabinet Secretary Suga has denied ‘helicopter money’ is being considered as a policy, it already exists in some form bar the formal acknowledgement. PM Abe’s economic advisor, Koichi Hamada, stated in an interview today that ‘helicopter money’ would be a huge gamble but that BOJ and government fiscal policy should work more closely together. We suspect this line from officials going forward – absolute denial of any form of ‘helicopter money’ but at the very same time taking action that will help sow the seeds of perception that Japan is effectively moving more in that direction.

So, we doubt the yen is about to imminently sell-off further. The surging current account surplus points to the potential for continued foreign currency conversion back to yen that will keep the yen well supported for now. Now that the Brexit drop in USD/JPY has been fully reversed, yen buying interest may well begin to pick up once more. But longer-term, Japan’s economic policy doesn’t appear consistent with a sustained trend of yen strength.”