Rise of Japanese currency overstreched: Nirmal Bang

Nirmal Bang has come out with its report on Japanese Yen. According to the research firm, the new governor of Bank of Japan (BoJ) will deliver by enhancing asset purchase program, albeit at a slower pace; the yen valuations could be a constraint on any significant fall in Q2 2013.

The Bank of Japan (BoJ) under the new leadership of Kuroda looks all set to roll out open-ended asset purchases immediately instead of 2014. The new governor has reiterated his stand on an aggressive monetary policy with an inflation target of 2 percent to be achieved over the next two years. The Bank of Japan has two key programs under which it feeds liquidity into the system via government bond purchases. One is the rinban, in place since 1966, wherein it buys long-term government debt in regular market operations worth 21.6 trillion yen of Japanese Government Bond (JGBs) per year. The other is the asset purchase program, introduced in 2010 as a monetary easing tool, wherein it buys government bonds with up to three years until maturity as well as corporate debt and trust funds investing in stocks and property. Under this program, the BoJ has pledged to supply 101 trillion yen by the end of 2013. With these liquidity programs in place, the focus now shifts to the increase in amount and duration of asset purchases. The fact of the matter is that market expectations from the upcoming BOJ meet are sky high. However, we believe that BoJ is likely to deliver but may not meet market expectations as the new governor would tread cautiously before getting re-elected after 8th April 2013. The resignation of the former governor Shirakawa early on March 19 as against the stipulated date of 8th April necessitates Kuroda to serve this interim period and then get re-elected after 8th April. In the build-up to the expectations of further monetary easing, the market seems to have overshot USDJPY pair and pushed yen in an under-valued territory as indicated by the Real Effective Exchange Rate Index (REER). The Japanese yen has fallen by about 7 percent in Q1 2013 following a 9 percent decline in Q4 2012 against the US dollar. Amid expectations of further easing of monetary policies, the rising interest rate (IR) differential between US and Japan too continued to drive the pair higher in Q1 2013. The US 10-year benchmark yields have risen against the backdrop of improvement in employment scenario, coupled with expectations of early cut back in the Fed's asset purchase program of USD 85 billion per month. The US Non-Farm Payroll for February 2013 printed 236k following a reading of 150k-odd for the previous two months. As a consequence, unemployment rate fell to 7.7 percent from 7.9 percent. Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions

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