Is Abenomics Working?

10/29/2013 9:00 am EST


Kathleen Brooks

UK and EMEA Research Director,

It’s been a year since the launch of Abenomics, so Kathleen Brooks of takes a look at its effect (if any) on the Japanese yen, the Japanese stock market, and the yen-dollar currency pair.

As anniversaries go, this one went according to plan—the Nikkei jumped 2% Monday, while the yen fell across the board. USD/JPY also extended gains after managing to stay above a key support level at 97.40—the 200-day sma—at the end of last week.

The symbolism of Monday's price action is worth noting. Abenomics is made up of three arrows: 1. monetary policy, 2. fiscal policy, and 3. structural reform. Of all these “arrows” the only one to hit the target has been monetary policy. Although it looks like PM Abe has managed to pass a much-needed hike to the sales tax to be implemented next year, there are still many fiscal challenges for a country with a debt-to-GDP ratio of more than 200% and Abe is going to have to continue to play catch up after years of official ignoring of Japan's fiscal problems. Structural reform has barely been touched.

Some stats on what the first arrow of monetary policy has achieved in the last 12 months:

1. The BOJ's balance sheet has exploded by 33% since November 2012.

2. The yen has declined by 20% on a broad-based basis, and USD/JPY is still up by 22% even though this cross has traded sideways since May.

3. The Nikkei has jumped by a whopping 66% in the last 12 months, even when taking account of a more mixed performance since the index peaked in May.

Abe's economic policies have, so far, been very good at weakening the yen and boosting Japanese equity prices. So what now?

Abe is unlikely to tick his first arrow off his to-do list quite yet, as his second arrow—fiscal reform—could still impact growth. If the economy is hit by next year's sales tax rise (and potentially more tax rises down the line) then we would expect further monetary policy stimulus to try and cushion the economic blow.

Thus, if monetary policy largesse is here to stay we could see further Nikkei strength and more yen weakness. However, we think that yen weakness could be more pronounced against currencies where central banks are on hold including GBP and EUR, compared to the USD.

So What About USD/JPY?
With both Japan and the US in the throes of fiscal reform and expansionary monetary policy, it could be a race to the bottom for both of these currencies. In the short term, the focus is likely to be on the FOMC meeting on Wednesday. The Fed is not expected to change the pace of its current QE3 program, with tapering now widely expected to be delayed until well into 2014. This could keep USD/JPY strength in check, and although it rose Monday, we think it could be faded by the market.

Technical View
The fact that key support at 97.40 held during the Friday session suggests that there are buyers on dips for this pair. However, we think that USD/JPY is in consolidation mode ahead of the FOMC meeting and any move towards 97.80—21-day sma, and then 98.20—high from Oct 23, could be used as a selling zone by the market in the short term.

Some Levels to Watch

97.80 - 21-day sma
98.20 - high from Oct 23
98.35-40 - 50 and 100-day smas.

97.40 - 200-day sma
96.95 - low from Oct 25

Click to Enlarge

Takeaway: The medium-term outlook is for a weaker yen and a stronger Nikkei due to the Japanese authorities’ commitment to monetary policy largesse; however the outlook for USD/JPY is heavily dependent on the US. In the short term, the FOMC meeting this week could keep USD/JPY gains capped.

By Kathleen Brooks, UK and EMEA Research Director,

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