EUR/JPY Monthly Fundamental Forecast – February 2016

Outlook and Recommendation

The EUR/JPY closed January at 131.19 as the yen was favored month of the month until a surprise by the Bank of Japan on the last trading day. The bank moved to negative interest rates. The pair ended with a slight gain of 0.39% as traders abandoned the safety of the yen as oil prices staged a recovery on the last few days of the month.  Market strategists had largely ruled out the possibility of further easing at Friday’s meeting after the BOJ adjusted its massive program of asset purchases at its December meeting. Though many expected the central bank to convey a dovish tone and leave the door open for more stimulus in the future.

Japan’s exporters need all the help they can get – 25 years of stagnation have taken their toll. So a drive to push down the value of the yen, making it easier to export, can be expected to raise a cheer in the sake bars of Kyoto. And that’s just what the Bank of Japan did when it imposed a 0.1% charge on deposits. It’s not the official policy objective – fighting inflation is. Conversely, the central bank emphasizes the negative impact on saving and therefore the incentive for corporates to spend their large cash piles.

But the key to understanding the latest move is the need to maintain an already depressed currency. This is because big business in Japan will not invest in extra production without the assurance that the yen will be low for at least the rest of the business cycle, which they hope could be another five years. Japan is an export junkie that needs the rest of the world to buy much more of the stuff it makes at home than they will ever buy from abroad.

The deposit charge works by acting as a disincentive for international investors to park their money in Tokyo. With fewer funds coming into the country, the demand for yen falls and so does the value of the currency, especially in relation to the all-important dollar.

FxEmpire provides in-depth analysis for each currency and commodity we review. Fundamental analysis is provided in three components. We provide a detailed monthly analysis and forecast at the beginning of each month. Then we provide more recent analysis and information in our  weekly reports and we provide daily updates and outlooks.

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