USD/JPY and BOJ: levels, Ranges, Targets

Japan’s yearly trade surplus in 2016 was reported at 4.07 Trillion JPY, or 35 Billion USD. In 2015, Trade Balance was negative 2.79 Trillion or 24 Billion USD. Autos and Electronics to emerging and advanced economies were responsible for the current surplus. To maintain momentum and a surplus, emerging and advanced economies must continue a higher growth outlook.
As BOJ board member Soto highlighted in his recent speech at Yale, Japan faces a ” serious” Labor shortage. Labor shortages place upward momentum on Wages yet the BOJ from February’s minutes and without details will institute policies to increse Wages. One option and mentioned by SOTO is to change the Union/ Wage agreements. Currently, agreements run 1 year and once contracted, Wage rates are solidified. Further Wage details lack specific plans as proposals are 2 months in the discussion/ Plan stages.
On track in CPI is to view rates of change. Most important information from the BOJ is shape of the yield curve. An upward slope is good while flat to downslope represents QE/Yield Control failure. If the long end begins to slope down, QE becomes a massive failure. So far, Yield slope is up and a continued rise over time in USD/JPY should be seen. Best way to view the future is take regular readings on the slope. Then all are ahead of the Japanese and USD/JPY.
Why higher growth forecasts is derived from the short end of Yield curve. At 80 Trillion JGB purchases or 713 billion USD, the BOJ is playing with fire and rolling an uncertain set of dice. In a chaotic world and at the end of the 50 year cycle, now isn’t the time to adopt such experiments.
Historically, the Japanese are economic activists true to their deep inner core as every economic experiment failed miserably since the early 1900’s. The commonality in every experiment failure is the Japanese government loves to confiscate money through tax increases. In the 1980’s and 1990’s, it was Sales and Stock Dividend taxes. Today, its Retail and Social Security Taxes. Much SS money is heading to a large aging population, retirees are the new tax target.
The Japanese taught us what doesn’t work in economics. I see more failure ahead. By purchase of the 10 year, the BOJ is miles to far out along the curve to even consider QE Yield Control a success.
USD/JPY support is located at 110.95 and a line not moving over many days. A break of exactly 112.19 is needed to see a massive resistance zone at 112.62 and 112.69.
Why 112.62 will result in a tough break is major companies in the Forward FX market are selling 112.62. We’re not looking for the break today nor are major companies. Below 112.19 then next comes 111.76, 111.62 and 111.48. . Fed Funds closed yesterday at 0.83, a massive drop from 0.91. A few points higher today could see higher for USD/JPY.
On the US political side, I’m looking at Trump Chief of Staff Reince Preibus as well as Paul Ryan and CO as sell outs to Trump but does Trump know it and what’s he doing is questionable. Reeibus and Ryan as usual capitulated to the Democrats on the budget deal. Unless Trump wakes up and stands for Republican  principles, he doesn’t have much of a shot.

 

Brian Twomey

 

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