USD/JPY - 2013 In Review

by Kenny Fisher

It's been a year of down, down and more down for the Japanese yen, which is trading at five-year lows against the U.S. dollar. USD/JPY started the year in the 86 range and has soared above the 104 line.

Movement of USD/JPY in 2013

2013 High - 104.65 (December 20)

2013 Low - 86.56 (January 1)

Monetary Policy Decisions of Bank of Japan:

The Bank of Japan continued its radical monetary program in 2013, and the yen responded with sharp losses against the U.S. dollar, as the slumping Japanese currency finds itself trading at five-year lows. The BOJ's monetary platform consists of increasing its monetary base and asset purchase (QE) programs. The BOJ said it will continue to increase the monetary base by 60-70 trillion yen annually and the purchase of Japanese government bonds by 50 trillion each year. The Bank's aggressive monetary policy has revived the economy and put the breaks on deflation, which had resulted in a stagnated economy for 15 years. At the same time, inflation in 2013 is expected at around 1%, well below the BOJ's target of 2%. GDP is looking much better, with a robust gain of 2.9% anticipated for 2013.

What to expect in 2014:

The BOJ expects economic growth to drop in 2013, but inflation is expected to rise. The Bank is forecasting economic growth of 1.5% next year, while inflation is anticipated to reach 1.3%. However, there is concern that these predictions may not be met, given the sales tax increase set for April, which will be raised to 8%, up from the current 5%. We can expect the BOJ to continue its aggressive monetary stance next year, given that one its primary goals is to reach its inflation target of 2%. As for interest rate levels, these have been below 0.10% and no change is expected for the foreseeable future.

Will the yen continue to lose ground? With the U.S. Federal Reserve finally tapering QE earlier this month, and the Bank of Japan continuing its aggressive monetary program, some analysts are predicting the USD/JPY could hit as high as 120 next year.

Events in 2013

The Bank of Japan saw a change at the very top, as Haruhiko Kuroda replaced Masaaki Shirakawa as governor of the BOJ in March. Kuroda was a strong supporter of monetary easing, and quickly set about implementing an aggressive monetary policy which involves doubling the monetary base in two years and reaching 2% inflation. Under Kuroda's guidance, the BOJ has been increasing the monetary base by 60-70 trillion yen annually and the purchase of Japanese government bonds by 50 trillion each year. Kuroda has been an ideal partner for Prime Minister Shinzo Abe, who took office in December 2012 and was determined to stamp out inflation and get the Japanese economy on its feet. The new monetary program, dubbed "Abenomics," involves a combination of government stimulus measures through changes in fiscal policy, massive monetary easing and structural changes in the economy. Without question, some sectors of the economy have improved, but wages have not increased and consumer spending remains weak.

The radical monetary program has taken a huge toll on the yen, which has shed about 17% of its value in 2013. This sharp drop has led to grumbling from Japan's trading partners, who have had to deal with more competitive Japanese exports, courtesy of a low yen. There have been accusations that Japan is manipulating the yen's exchange rate in order to boost exports, but Abe and Kuroda have flatly denied these charges, saying that the yen's losses are a result of the country's monetary program which is aimed at boosting inflation.

In the U.S., the Federal Reserve announced last week that it would begin tapering its QE program by $10 billion a month, commencing in January. This will reduce the Fed's asset purchases to $75 billion every month, comprised of $40 billion in Treasuries and $35 billion in mortgage bonds. The announcement came as somewhat of a surprise, as most analysts had expected the Fed to hold off on any QE reductions until early next year.

In its dramatic tapering announcement, the Federal Reserve was careful to separate tapering from rate hike expectations. Fed chairman Bernard Bernanke stated that interest rates are likely to remain low even after the unemployment rate drops below 6.5%. Previously, the Fed had stated that it would start to consider rate increases when unemployment fell below this level. Bottom line? With the U.S. unemployment rate at 7.0%, it could be a while before we see higher interest rates in the U.S.

As we have already mentioned in a previous article:

Earlier in the year Republicans and Democrats held the government hostage and played a dangerous game of brinkmanship that almost resulted in a sovereign default by the United States for the first time in its history. After weeks of finger pointing and political brinkmanship, Congress finally got its act together and voted to fund the government and raise the debt ceiling. The shutdown, which lasted for over two weeks and temporarily threw hundreds of thousand of federal employees out of work, is estimated to have cost the economy $24 billion. The cost of the debt crisis is harder to quantify, but has certainly eroded faith in the U.S. economy. This was underscored by a warning from Fitch Ratings, when the agency put U.S. debt on a negative watch. Fitch stated that the crisis had cast doubt over the credit of the United States and had undermined confidence "in the role of the U.S. dollar as the pre-eminent global reserve currency". The Republicans were the losers in this episode, as they failed to obtain any concessions regarding the Obama Health Care Act and were blamed by most of the public for precipitating an unnecessary political and fiscal crisis.

Source: USD/JPY - 2013 In Review

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