WisdomTree: First Arrow of Abenomics Remains on Target

Levels of the Yen

The BOJ’s monetary programs have contributed to the yen weakening against the U.S. dollar from the 80s to over 100. The pace of the decline was dramatic last year, and not many expect it to continue at this level. Corporate Japan, which benefited from the yen weakness, feels much more comfortable in the current situation and is not complaining to the BOJ about receiving more currency support. Yet currency weakness for the yen still seems likely as a baseline scenario.

A level of 108 yen to the U.S. dollar is the analyst consensus—based on the differentials in monetary policies between the U.S. and Japan, differentials in interest rate and the trade dynamics. From our conversation, it seems the level of 110 may be a bit ambitious for this year. Looking further ahead, if the yen were to weaken beyond 120–125, this is where market participants may become more concerned about the potential negatives of yen depreciation—driving up import prices and prices for consumers—overtaking the benefits—the higher inflation levels, stimulated corporate profits and improved sentiment with equity market gains.

Summary

Mr. Ide asked what key indicators I am watching this year. My comment: the first arrow of Abenomics, what the BOJ is doing, has been to me a bull’s-eye. I have complete faith that the BOJ will continue to be supportive of the markets and the economy, adapting as necessary to expand its programs if the economic data comes in weak. Everyone is watching for progress on Abe’s third-arrow growth strategy, the consumption tax set for April 1, how wages move this year, and how tax policy is set to change. We will continue our takeaways from my latest Japan trip with further discussion on these issues.

¹See, e.g., a discussion in: Kikuo Iwata, “Purpose and Mechanism of Quantitative and Qualitative Monetary Easing,” Bank of Japan, 10/18/13.