EUR/JPY Monthly Fundamental Forecast – March 2016

Outlook and Recommendation

The EUR/JPY closed at 122.78 falling 6.43% for the month as the euro fell hard at the end of the month, while the JPY gained on safe haven moves. This month will be all about central bank actions and stimulus with the ECB and the BoJ in focus. Easing monetary policy in December takes the ECB out of the picture in Q1 16. But if there is little improvement in inflation prospects nearer midyear, and if the euro remains resilient and oil heavy, then the doves may push for more action. Unlike previously though, it did not prove to be the case, Draghi did not indicate that the -30 bp deposit rate exhausts interest rate policy. Fiscal policy also looks to be less restrictive in 2016 than it had looked to up until late 2015.

Bank of Japan Governor Haruhiko Kuroda was told again Monday to clarify the effects of negative rates on consumers, highlighting how he has become a target of opposition politicians.

“I have no expectations at all that financial institutions will impose negative rates on individual depositors,” Kuroda told opposition lawmaker Takeshi Shina.

If commercial banks began to charge the deposits of retail customers, individuals would withdraw cash and hold it in the form of bank notes, Kuroda says. Such prospects would likely discourage banks from trying it, he adds.

In addition, a series of Japanese opinion polls show that the general public has low expectations for the Bank of Japan’s negative rate policy. A joint survey released Sunday by Nikkei and broadcaster TV Tokyo shows that 53% of respondents don’t appreciate the rate policy, as opposed to the 23% who do.

After rebounding in Q3 on stronger-than-expected dynamics in investment, Japanese GDP decelerated in Q4 as manufacturing activity was less robust and investment was less buoyant than in Q3. On the upside, continued low oil prices, coupled with stronger consumer confidence, likely acted as a cushion to support the economy. In the political arena, Prime Minister Shinzo Abe faced his most serious challenge since taking office in 2012: Akira Amari, Minister of State for Economic and Fiscal Policy, resigned on 28 January amidst corruption allegations. Amari was one of Abe’s most trusted allies and Japan’s chief negotiator for the Trans-Pacific Partnership (TPP) agreement. The scandal represents a significant blow for Abe and increases uncertainty regarding the future implementation of Abenomics economic policies.

This continues a string of aborted liftoffs for Japan over the years; however, there are indications that the economy may catch an updraft in 2016. Chief among these is the nascent upturn in wages, which if extended could reinforce a virtuous cycle of higher consumption, more investment, faster GDP growth and rising incomes. Keep in mind that although employment growth is moderating, the labor market is tight, with unemployment at a 20-year low. The ratio of job openings to job seekers is also high (see Exhibit 52), with companies reporting that vacancies are difficult to fill. Attempting to support further compensation gains, the government has targeted a 3% increase in the minimum wage this year. Taken together, these developments should improve labor income.

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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March 1, 2016