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Takeaway: If improving economic data helps get the LDP elected to an Upper House majority come July, it’s ultimately structurally bearish for the yen.

SUMMARY BULLETS:

  • As it relates to our structural bear case on the Japanese yen, we continue to view marginal improvement in Japanese growth data over the intermediate term as an ultimately bearish factor for the yen on a TAIL duration, as it helps strengthen the LDP campaign ahead of the JUL Upper House elections. Specifically, total LDP control of Japan’s bicameral legislature will give the party that brought us “Abenomics” a free pass to enact any fiscal Policies To Inflate they feel entitled to in the event the Japanese economy fails to achieve their +3% nominal GDP growth targets.
  • Moreover, with control over both houses of the Diet, they’ll be able revise the BOJ’s charter to the extent Kuroda’s team fails to deliver the +2% inflation it has repeatedly promised to help produce. As a reminder, Japan’s YoY CPI actually slowed -20bps in MAR to -0.9%, so there’s a lot of hay to bale on both the growth and inflation fronts from here.
  • We reiterate our view that Japanese policy is set to remain decidedly dovish for the foreseeable future. Much like the mid-to-late 1990s, the growing rift between US and Japanese policy is set to perpetuate sustainable strength on USD/JPY cross over the long-term TAIL. Our call for an improving US economy  – something consensus simply would not agree with even as recently as one month ago – continues to play out in spades. That only insulates our call for the aforementioned policy divergence.
  • Our refreshed immediate-term risk range on the USD/JPY cross is included in the chart below. Simply put, we think now is a great spot to add to your short yen/long Nikkei exposure.

The past 24 hours produced some pretty decent MAR/APR economic data out of Japan – arguably the best batch of growth data we’ve seen in roughly a year. Industrial Production, Overall Household Spending, Retail Sales and Housing Starts all accelerated in MAR, while the Manufacturing PMI posted an acceleration in APR. Additionally, Japan’s Unemployment Rate ticked down in MAR:

  • MAR Industrial Production: -7.3% YoY from -10.5% prior;
  • MAR Overall Household Spending: +5.2% YoY from +0.8% prior (fastest YoY gain since FEB ’04);
  • MAR Retail Sales: -0.3% YoY from -2.2% prior;
  • MAR Housing Starts: +7.3% YoY from +3% prior;
  • APR Manufacturing PMI: 51.1 from 50.4 prior; and
  • MAR Unemployment Rate SA: 4.1% from 4.3% prior.

IS GOOD DATA BAD FOR THE YEN? - 1

 

IS GOOD DATA BAD FOR THE YEN? - 2

 

IS GOOD DATA BAD FOR THE YEN? - 3

 

While some of the aforementioned YoY growth numbers were far less than buoyant from an absolute perspective, the 2nd derivative deltas (i.e. what matters in macro) all moved in the right direction. While we still don’t buy into the consensus view among mainstream economists that monetary Policies To Inflate as causal to sustainable economic growth, we won’t blindly deny Japan this cyclical opportunity to confirm an escape from the country’s third recession in five years.

As it relates to our structural bear case on the Japanese yen, we continue to view marginal improvement in Japanese growth data over the intermediate term as an ultimately bearish factor for the yen on a TAIL duration, as it helps strengthen the LDP campaign ahead of the JUL Upper House elections. Specifically, total LDP control of Japan’s bicameral legislature will give the party that brought us “Abenomics” a free pass to enact any fiscal Policies To Inflate they feel entitled to in the event the Japanese economy fails to achieve their +3% nominal GDP growth targets.

Moreover, with control over both houses of the Diet, they’ll be able revise the BOJ’s charter to the extent Kuroda’s team fails to deliver the +2% inflation it has repeatedly promised to help produce. As a reminder, Japan’s YoY CPI actually slowed -20bps in MAR to -0.9%, so there’s a lot of hay to bale on both the growth and inflation fronts from here.

IS GOOD DATA BAD FOR THE YEN? - 4

We reiterate our view that Japanese policy is set to remain decidedly dovish for the foreseeable future. Much like the mid-to-late 1990s, the growing rift between US and Japanese policy is set to perpetuate sustainable strength on USD/JPY cross over the long-term TAIL. Our call for an improving US economy  – something consensus simply would not agree with even as recently as one month ago – continues to play out in spades. That only insulates our call for the aforementioned policy divergence.

IS GOOD DATA BAD FOR THE YEN? - 5

In the interim, however, the USD/JPY cross has indeed backed away hard from the psychologically-important 100 line. This has been driven by repatriation of foreign assets (six consecutive weeks on a net basis) as the yen has approached what appears like historically-favorable rates on a trailing 3-5yr duration.

IS GOOD DATA BAD FOR THE YEN? - 6

We reiterate our view that consensus – be it Japanese households, Japanese corporations, sell-side actors or buy-side speculators – remain Not Bearish Enough on the Japanese yen from here. That, combined with our thesis as updated above, helps us feel comfortable reiterating our call for yen weakness and Japanese equity market strength with respect to the intermediate-term TREND duration.

Our refreshed immediate-term risk range on the USD/JPY cross is included in the chart below. Simply put, we think now is a great spot to add to your short yen/long Nikkei exposure.

Darius Dale

Senior Analyst

IS GOOD DATA BAD FOR THE YEN? - 7