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19 Aug 2013
Is Yen condemned to target 120.00 as history repeats itself in Japan?
FXstreet.com (Barcelona) - There is an interesting article being published by Vincent Cignarella, currency strategist/columnist at The Wall Street Journal, titled 'Japan’s Consumption Tax Threatens to Kill Its Currency.'
While the article comes, unsurprisingly, to the conclusion of a weaker Yen mid-term if the sales tax is fully implemented, sharing an extensively reported view by FXstreet.com Asian Team back on July 30th, August 11th or August 12th, Cignarella provides historical facts that prove Japan's worsening economic conditions as a result of a similar consumption tax hike back in April of 1997, when the consumption tax was raised from 3% to 5%, only to fall into recession shortly thereafter.
However, as Cignarella notes, the subtle difference back then was the convergence with the 1997 Asian financial crisis, "although many believe the tax rise contributed substantially to the depth of the fall" Cignarella writes.
Following the decision to address Japan's sovereign debt in 1997 - when it was nearing 100% vs 200% now -, the USD/JPY collapsed from 127.00 at the end of April 1997 to Y112.00 in May of 1997. However, the sharp deterioration in the value of the US Dollar was ephemeral, and as Cignarella notes, "over the next 15 months, the dollar rocketed over 30% higher against the Yen, reaching Y147.62 in August 1998, as investors exited the low-yielding yen in favor of the dollar–which carried a much higher interest rate."
Cignarella attributes the sales tax hike and financial crisis on making the situation worse, saying "While the tax increased inflation in fiscal year 1997 and 1998 from 0.3% to 2.1%, the trend didn’t last." The Strategist appears quite confident calling for the USD/JPY exchange rate to fire away towards Y120.00 if the tax is implemented, on the basis of further easing by the BoJ.
In closing, Cignarella's view is that Japan should put off the tax increase in order to prevent unnecesary headwinds in the economy, at a time when it remains still very fragile. In words of Cignarella, "if Japan goes ahead with the tax increase, the decline in Japan’s currency will come."
At FXstreet.com Asia, we have been suspecting that the tax sales hike may be delayed or at worst just increased by 1% increments, especially after the big miss in Japan's GDP last week. If that is the case, patience to see sustained JPY weakness is required, as the BoJ may avoid further easing by first allowing 'the benefit of the doubt' on whether or not the new 1% increments scheme being studied is workable, before deciding on using more its 'money-printing' ammunition.
While the article comes, unsurprisingly, to the conclusion of a weaker Yen mid-term if the sales tax is fully implemented, sharing an extensively reported view by FXstreet.com Asian Team back on July 30th, August 11th or August 12th, Cignarella provides historical facts that prove Japan's worsening economic conditions as a result of a similar consumption tax hike back in April of 1997, when the consumption tax was raised from 3% to 5%, only to fall into recession shortly thereafter.
However, as Cignarella notes, the subtle difference back then was the convergence with the 1997 Asian financial crisis, "although many believe the tax rise contributed substantially to the depth of the fall" Cignarella writes.
Following the decision to address Japan's sovereign debt in 1997 - when it was nearing 100% vs 200% now -, the USD/JPY collapsed from 127.00 at the end of April 1997 to Y112.00 in May of 1997. However, the sharp deterioration in the value of the US Dollar was ephemeral, and as Cignarella notes, "over the next 15 months, the dollar rocketed over 30% higher against the Yen, reaching Y147.62 in August 1998, as investors exited the low-yielding yen in favor of the dollar–which carried a much higher interest rate."
Cignarella attributes the sales tax hike and financial crisis on making the situation worse, saying "While the tax increased inflation in fiscal year 1997 and 1998 from 0.3% to 2.1%, the trend didn’t last." The Strategist appears quite confident calling for the USD/JPY exchange rate to fire away towards Y120.00 if the tax is implemented, on the basis of further easing by the BoJ.
In closing, Cignarella's view is that Japan should put off the tax increase in order to prevent unnecesary headwinds in the economy, at a time when it remains still very fragile. In words of Cignarella, "if Japan goes ahead with the tax increase, the decline in Japan’s currency will come."
At FXstreet.com Asia, we have been suspecting that the tax sales hike may be delayed or at worst just increased by 1% increments, especially after the big miss in Japan's GDP last week. If that is the case, patience to see sustained JPY weakness is required, as the BoJ may avoid further easing by first allowing 'the benefit of the doubt' on whether or not the new 1% increments scheme being studied is workable, before deciding on using more its 'money-printing' ammunition.