Arranged for Global Interdependence Center, 2010 International Conference in Paris
June 17th, 2010
Outlook of Yen DIAM Co. Ltd Chief Economist
Kozo Koide
Outlook of Yen (GIC, Paris) June 17, 2010 DIAM Economic Research
1
Recent Move of YEN, Within a Range 2010 : Range from about 89 to 95 yen/$ $/Yen
< $/YEN Rate (Daily) >
98
1/8: Kan (Minister of Finance, at inauguration) "Cheap yen is preferable"
8/30: Landslinding Victory of DPJ
97 96
1/21: Obama "Volker Plan"
9/24: Fujii (Minister of Finance, at the meeting with Secretary Gaithner) "FX market is a stronghold of free
95
6/2: Resignation of Hatoyama
94 93
3/31:The end of Japanese FY
92 91 90
5/6: ECB, not discuss the purchase of government bonds
89 88
11/29: Fujii after Dubai Shock: "watch & see"
87
3/3: Greece "Aditional cut of fiscal budget"
Outlook of Yen (GIC, Paris) June 17, 2010 DIAM Economic Research
10.06.07
10.05.24
10.05.10
10.04.26
10.04.12
DIAM Economic Research
Data:Bloomberg
2
10.03.29
10.03.15
10.03.01
10.02.15
10.02.01
10.01.18
09.12.21
09.12.07
09.11.23
09.11.09
09.10.26
09.10.12
09.09.28
09.09.14
09.08.31
09.08.17
10.01.04
12/1: BOJ introduced new liquidity supply facility
86 09.08.03
ď ľ
YEN Pendulum in the Last Decade YEN has been appreciated due to flight to ‘quality’. – Financial crisis invited higher risk premium upon deficit countries’ currency. – Interest rate differentials or external imbalance. Japan : Low interest rate but has large current surplus. Capital mobility matters. \
< $/YEN Rate >
$
135
100MYen
80,000
FX Intervention by Japan(RHS) /Yen Rate
130
70,000
125
60,000
120
Pariba Shock
115
50,000
110
40,000
105
Greece Crisis
100 Lehman Shock
95
Source:BOJ
DIAM Economic Research Outlook of Yen (GIC, Paris) June 17, 2010 DIAM Economic Research
20,000
0 10.07
09.07 10.01
08.07 09.01
07.01 07.07
06.07
05.07 06.01
04.07 05.01
04.01
03.01 03.07
02.07
01.07 02.01
00.07 01.01
08.01
Dubai Shock
85
3
30,000
10,000
90 00.01
Real Interest Rate Differentials & $/YEN Not instant sensitivity with $/Yen exchange rate, though ... – But it has become higher in about the last 5 years. < $/Yen Rate & Real Interest Rate Differentials >
2.5
$/Yen (Monthly Average,LHS)
6 US > JPN
LOG10
Short-term real interest rate differential (3MLibor, US -- JPN)
7
More Sensitive
5
2.4
4 3
2.3
2 1
2.2
0 ▲1
2.1
▲2 ▲3
2.0
▲4 ▲5 Data:Datastream, Ministry of Internal Affairs & Communications(JPN), Department of Labor(US)
4
09.01
08.01
07.01
06.01
05.01
04.01
03.01
02.01
01.01
00.01
99.01
98.01
97.01
96.01
95.01
94.01
93.01
92.01
91.01
90.01
89.01
88.01
87.01
86.01
1.9 85.01
US < JPN
DIAM Economic Research
Outlook of Yen (GIC, Paris) June 17, 2010 DIAM Economic Research
Break in Causality : Interest Rate & FX ď ľ
From mid 2008, the causality has been weakened. Fig.Granger-Sims Causality Test 100%
AUDUSD EURUSD GBPUSD CADUSD
02/26/2010
0% 11/30/2009
0% 08/31/2009
10%
05/29/2009
10%
02/27/2009
20%
11/28/2008
20%
08/29/2008
30%
05/30/2008
30%
02/29/2008
40%
11/30/2007
40%
08/31/2007
50%
05/31/2007
50%
02/28/2007
60%
11/30/2006
60%
08/31/2006
70%
05/31/2006
70%
02/28/2006
80%
11/30/2005
80%
08/31/2005
90%
02/28/2005
P-Value
Interest rate gap to FX rate
100%
90%
05/31/2005
Lower Causality
Granger /lag=6
5
P-Value
:
Miziho-DL Financial Technology
5
Outlook of Yen (GIC, Paris) June 17, 2010 DIAM Economic Research
Current A/C Surplus & $/YEN Rate Higher Yen regardless of contraction of current surplus < Current A/C of Japan & $/YEN Rate > $/YEN Rate
2.4
JPN:Current Account / Nominal GDP (4QTotal %, RHS) 1.0
2.3
1.5
2.3
2.0
2.2
2.5
2.2 3.0 2.1 3.5
2.1
4.0
2.0
6
Outlook of Yen (GIC, Paris) June 17, 2010 DIAM Economic Research
10.09
09.09
08.09
07.09
06.09
05.09
04.09
03.09
02.09
01.09
00.09
99.09
98.09
97.09
96.09
95.09
94.09
93.09
92.09
91.09
5.0 90.09
1.9 89.09
4.5
88.09
2.0
87.09
ď ľ
Capital A/C : Portfolio vs. Others Large swing of portfolio investment & other investment < Capital Accounts (6Mts, Total) >
Source:MOF
7
10.01
09.07
09.01
08.07
08.01
07.07
07.01
06.07
Financial Derivatives FDI Capital Account
06.01
05.07
05.01
04.07
04.01
03.07
02.07
300,000 250,000 200,000 150,000 100,000 50,000 0 ▲ 50,000 ▲ 100,000 ▲ 150,000 ▲ 200,000 ▲ 250,000 ▲ 300,000 ▲ 350,000 ▲ 400,000
03.01
Portfolio Investment Other Investment Other Capital Accounts
100 Mil. Yen
02.01
DIAM Economic Research Outlook of Yen (GIC, Paris) June 17, 2010 DIAM Economic Research
Japanese, not Taking Much Outright FX Risk
Bank & pension are using more hedging operation Growing mutual fund take more FX risk – But the majority is going to emerging &/or high interest rate zone. Outward Portfolio Investment (Equity & Long/Mid-term Bond) Life Insurance Trust Bank (Trust A/C) 1 0 0 M \ Others 2 5 0 , 0 0 0
Bank(including Banking A/C of T/B) Mutual Fund Total
2 0 0 , 0 0 0 1 5 0 , 0 0 0 1 0 0 , 0 0 0 5 0 , 0 0 0 0
0 1 . 0 9 0 1 . 1 2 0 2 . 0 3 0 2 . 0 6 0 2 . 0 9 0 2 . 1 2 0 3 . 0 3 0 3 . 0 6 0 3 . 0 9 0 3 . 1 2 0 4 . 0 3 0 4 . 0 6 0 4 . 0 9 0 4 . 1 2 0 5 . 0 3 0 5 . 0 6 0 5 . 0 9 0 5 . 1 2 0 6 . 0 3 0 6 . 0 6 0 6 . 0 9 0 6 . 1 2 0 7 . 0 3 0 7 . 0 6 0 7 . 0 9 0 7 . 1 2 0 8 . 0 3 0 8 . 0 6 0 8 . 0 9 0 8 . 1 2 0 9 . 0 3 0 9 . 0 6 0 9 . 0 9 0 9 . 1 2 1 0 . 0 3 1 0 . 0 6
▲ 5 0 , 0 0 0
12 mts. Total
▲ 1 0 0 , 0 0 0
S o u r c e : M O F
8
DIAM Economic Research
Outlook of Yen (GIC, Paris) June 17, 2010 DIAM Economic Research
US$/YEN, & Effective Exchange Rate YEN, not so appreciated against ‘other’ currencies. < Yen Exchange Rate >
Jan. 2000 = 100 80
120.00
90
110.00
100
100.00
110
90.00
120
80.00
130
70.00
140 150 160
60.00
US$/YEN AUD$/YEN Nominal Effective Exchange Rate (RHS)
50.00 40.00
00.01 00.07 01.01 01.07 02.01 02.07 03.01 03.07 04.01 04.07 05.01 05.07 06.01 06.07 07.01 07.07 08.01 08.07 09.01 09.07 10.01 10.07
Source: BoJ, Bloomberg
9
DIAM Economic Research
Outlook of Yen (GIC, Paris) June 17, 2010 DIAM Economic Research
Unwinding of Yen Carry has been Stabilized Bank’s interoffice flow has become neutral. Other Investment ex.Trade Credits (6mts. Total) Bank's Interoffice Account(L/T) Securities Lending Repurchase Agreement Others Currrency & Deposit Other Investment (ex. Trade Credits)
1 0 0 M \
3 0 0 , 0 0 0
Other L/T Loans Bank's Interoffice Account(S/T) Others Other Assets/Liabilities
2 0 0 , 0 0 0 I N
1 0 0 , 0 0 0 0
O U T
▲ 1 0 0 , 0 0 0
1 0 . 0 4
1 0 . 0 1
0 9 . 1 0
0 9 . 0 7
0 9 . 0 4
0 9 . 0 1
0 8 . 1 0
0 8 . 0 7
0 8 . 0 4
0 8 . 0 1
0 7 . 1 0
0 7 . 0 7
0 7 . 0 4
0 7 . 0 1
0 6 . 1 0
0 6 . 0 7
▲ 3 0 0 , 0 0 0
0 6 . 0 4
▲ 2 0 0 , 0 0 0
0 6 . 0 1
DIAM Economic Research Source:BOJ
10
Outlook of Yen (GIC, Paris) June 17, 2010 DIAM Economic Research
About 7Qs Time Lag ď ľ
From 1998 : Average time lag between current A/C & Yen was 21mts Response of YENEFFECT to Cholesky One S.D. CURRENTAC Innovation 8 6 4 2 0 -2 -4 -6 5 11
10
15
20
25
30
Outlook of Yen (GIC, Paris) June 17, 2010 DIAM Economic Research
35
Current A/C Surplus & $/YEN Rate If we assume a time lag for 7Qs before moving rate... < Current A/C of Japan & $/YEN Rate > L og10 2.4
$/YEN Rate JPN:Current Account / Nominal GDP (4QTotal %, RHS,7Qleading)
2.3
1.0 1.5
2.3
2.0
2.2
2.5
2.2 3.0 2.1 3.5
2.1
4.0
2.0
Source : Cabinet Office, BOJ, Bloomberg
12
Outlook of Yen (GIC, Paris) June 17, 2010 DIAM Economic Research
10.09 11.09
06.09 07.09 08.09 09.09
03.09 04.09 05.09
99.09 00.09 01.09 02.09
5.0 96.09 97.09 98.09
1.9 93.09 94.09 95.09
4.5
89.09 90.09 91.09 92.09
2.0
87.09 88.09
ď ľ
DIAM Economic Research
Cristal Ball, with Many Colors Current level is higher than ‘fundamental’ value, but... – 59, 70, 98, 105, 113 $/Yen 280 260 240
< PPP Rate of $/YEN > $/YEN Rate PPP(CGPI & PPI final goods) PPP(CPI core)
220 200 180 160 140 120 100 80 60 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Dat a:Dat astream, BOJ , Ministry of Internal Affairs & Tellecommunication(J PN), DoL(US)
13
Outlook of Yen (GIC, Paris) June 17, 2010 DIAM Economic Research
Yen Bull, Pushed out of the Edge of a Cliff ?
14
Outlook of Yen (GIC, Paris) June 17, 2010 DIAM Economic Research
Shaky Greece & Yen Volatile Greece government bond market < $/Yen
higher yen
Greece Government Bond >
$/Yen Volatility of Greece government bond yeild(10ys,RHS)
86
11.0 10.0
87
9.0
88
8.0
89
7.0
90
6.0
91
5.0 4.0
92
3.0
93
2.0
94
1.0
(Note)Volatility : S.D. of daily change (30DMW)
Source Bloomberg
15
10.06
10.05
10.04
10.03
10.02
10.01
0.0 09.12
95 09.11
ď ľ
DIAM Economic Research Outlook of Yen (GIC, Paris) June 17, 2010 DIAM Economic Research
BOJ, Took a Step Ahead BOJ has introduced new liquidity supply on Dec. 1, ’09. – The near-term direct effect against deflation is restricted. – But affected the expectation in the market about future policy. – Planning new initiative for corporate finance O/N Call Rate
100M\
O/N Call Rate (right scale)
0.80
Note Shadow : Target of BOJ Reserve Account
350,000
0.70
BOJ
09.10
09.04
08.10
08.04
07.10
07.04
06.10
06.04
05.10
05.04
0.00 04.10
04.04
0.10
03.10
50,000
03.04
0.20
02.10
100,000
02.04
0.30
01.10
150,000
01.04
0.40
00.10
200,000
00.04
0.50
99.10
250,000
99.04
0.60
98.10
300,000
Source
16
Reserve Account in BOJ (Monthly Average)
BOJ Reserve Account
400,000
98.04
DIAM Economic Research
Outlook of Yen (GIC, Paris) June 17, 2010 DIAM Economic Research
JGB : Japanese Market
9 % of outstanding was held by Japanese (incl. FILP bond) – Due to the large domestic savings under deflation, JGB has been held stably by domestic investors. < G7:Currentof Account / General Gov. Balance (% GDP) > – What is the implication KAN-sian policy? CY2008 ( General Gov. Balance (% of GDP) ) 1.0
Canada
Germany
0.0 ▲ 1.0 ▲ 2.0
Italy
▲ 3.0
France
▲ 4.0
UK ▲ 5.0
Japan
▲ 6.0
US ▲ 7.0 ▲ 4.0 Source: IMF
17
▲ 2.0
0.0
2.0
DIAM Economic Research
4.0
6.0
8.0
( Current Account (% of GDP) )
Outlook of Yen (GIC, Paris) June 17, 2010 DIAM Economic Research
18
Outlook of Yen (GIC, Paris) June 17, 2010 DIAM Economic Research