We published a bullish view on the Japanese Yen today on Seeking Alpha. Below are some excerpts:
- The downside reversal in USD/JPY suggests the yen remains the world’s only true safe-haven currency and the bull market that began in 2015 remains intact.
- U.S. real interest rates are now no longer higher than Japan’s and the recent narrowing suggests the yen should be trading around 100.
- Japan’s rising net external assets should increasingly support yen repatriation inflows while the U.S.’s indebtedness will necessitate negative real interest rates.
- Fiscal largesse no longer just a Japan problem.
- The yen is deeply undervalued despite the positive fundamental outlook.
“Japan’s real bond yields are now higher than the U.S. after a significant drop in U.S. real yields, and recent trends suggest the yen should be trading at around 100. We also expect real yield spreads to head further in the yen’s favour over the medium term thanks to Japan’s widening advantage in terms of its net external assets and relative improvements in its fiscal position. Given its level of undervaluation, we believe the yen should trade significantly stronger.”
“Japan’s rising net external assets represent a huge potential upside force on the yen as local residents and corporates repatriate cash back home. Japan is in the enviable position of having net external assets equivalent to an estimated 66% of GDP at the end of 2019. Times of global risk aversion highlight the upside potential posed by yen repatriation, but we do not necessarily need to see global financial panic for Japanese external asset repatriation to provide support to the yen. Even mild steady net inflows should help to keep inflation low, supporting real yields.”
“Yen strength since the 2015 lows has been largely offset by lower inflation helping Japan remain highly competitive. The real bilateral USD/JPY exchange rate remains near its weakest level on record. Such undervaluation is also evident based on the relationship between the country’s level of GDP per capita relative to its average price level. While currency valuations tend to have little bearing on near-term currency performance as they mean revert over periods of several years, record low valuations for the yen offer a low risk, high reward setup.”
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