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empoli ab  07:56:55 GMT - 01/07/2010  

usd/yen
Entry: Target: Stop:
Some interesting thoughts on yen by Nomura intl:

"Implications of new Finance Minister Kan (from Ikeda san)

Appointment of new Finance Minister Kan could be JPY negative on margin

Today, Naoto Kan (63) was appointed the new Finance Minister of Japan, succeeding Hirohisa Fujii (77), who has been ill in hospital over the past two weeks.

In our view, Kan's appointment will be regarded as relatively JPY negative on margin. There are two points of discussion: Forex policy and fiscal policy.

1) Kan appears to be more flexible and market friendly than Fujii, who has often been seen as dogmatic. As a Deputy Prime Minister, Mr Kan tended to stress the importance of an active monetary policy to weaken JPY. He actually argued prior to BOJ's additional easing (1 Dec), that higher real interest rates in Japan were one of the factors causing appreciation of JPY. When USD/JPY rallied to 88 as a reaction to the BOJ action, he said "I wish the yen would weaken a little more". Then, when USD/JPY reached 90, he said "Since the majority of Japanese companies are assuming USD/JPY at 90 or above, I think USD/JPY moving close to 90 is a good thing."

We do not think Mr Kan will take immediate action to weaken JPY further from the current level. If USD/JPY rapidly breaks the 90 level again, however, he may act much sooner than Fuji would have, in our view, beginning with verbal intervention.

2) As an old-school ex-MOF bureaucrat, Hirohisa Fujii advocated fiscal discipline. Compared to him, Naoto Kan appears to be more pro-growth/populist and less concerned about Japan's ailing fiscal conditions. We believe that a change in fiscal policy could exacerbate expansion of the budget. In this context as well, his appointment looks JPY negative in the medium-term.

But not significant enough to change our bullish view on JPY

That said, today's political event is not significant enough to change our bullish view on JPY for the following reasons:

1) Although the market will likely view Kan as more active in terms of intervention policy, internationally such a move is increasingly frowned upon: the US-Japan relationship has been worsening as a result of issues surrounding the US military base at Futenma in Okinawa. A new Finance Minister could easily talk down JPY but may find it difficult to implement real intervention without US support.

2) The majority of the USD/JPY rally since the beginning of December is attributable to the widening interest rate differential between US and Japan, in our view. Of course, this was largely a result of the rise in US rate hike expectations. If the market (again) factors in such a bullish scenario, we think USD/JPY will naturally decline with it.

3) The majority of Japanese exporters had already completed JPY hedging operations for FY2009 (ending Mar 2010) when USDJPY rose above 90 as a reaction to surprising payrolls data from the US. Since then, there have been no significant JPY (forward) buying orders from them, allowing JPY to weaken without strong resistance. However, as is typical for the second half of January, Japanese exporters will start hedging their FX exposures. Considering that their medium-term target for USDJPY on average is around 90, we think they will see it as a good opportunity to buy JPY above that level to lock in their profits."






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