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13 Aug 2013
Yen short trade revival subject to Japan's sales tax chatter...
FXstreet.com (Barcelona) - By now, the market completes a full trading day in which investors and traders had the opportunity to digest what to make out of Monday's disappointing Japan Q2 GDP data, but most importantly, what might be the implications on the widely covered topic of the sales tax hike.
As reported yesterday, the big miss in the Japanese growth figures, displaying a -1% negative deviation from 3.6% expected to 2.6% preliminary data, is not helping the case to implement a planned 3% aggressive increase on the sales tax. Historically, there are well-founded reasons to fears that the economy may face some undesirable headwinds. Instead, Japanese policy-makers are growing more vocal on either a more conservative 1% incremental approach on the sales tax, or even delaying the tax hike by one year after Japan's PM Abe Adviser, Mr. Hamada,was quoted earlier yesterday saying "there is no need to hurry with the sales tax hike after the weaker-than-expected Q2 GDP as it might harm the economy."
On the flip side, BoJ Chief Kuroda said last week that it is not necessary a delay in the sales tax hike, saying that “ending deflation and raising the sales tax are achievable at the same time.”
Is this time different?
Bruce Clark from IFR Markets thinks this time is not different for Japan, as they want the market to believe. According to Clark, "Japan's GDP miss confirmed what the JGB market has been hinting at for several weeks, that is, the current iteration of Abenomics probably isn't enough to push an economy beset by enormous demographic and debt headwinds up over the crest of the proverbial hill." In view of Clarck, the decline in Japanese yields "are a sure sign that like the many previous episodes in the past twenty years when the Japanese assured us that 'this time is different', it's most likely not."
The cruel reality well described by Clark above comes at a time when the popular Yen short trade has been losing significant momentum, as the market reached the point of 'enough pricing' from the radical easing measures undertaken by the BoJ. Market dynamics, which tend to vary price tendencies notably as the support towards a particular direction gets heavily overcrowded, documented weekly on the CFTC specs positioning report, is also part of the reasons having burnt out longs late to the party.
Why so much buzz about the sales tax?
If one wonders why the sales tax issue is so widely covered in the FX arena, it all has to do with the potential ramifications it may have on new monetary policies the Bank of Japan may adopt subject to the impact on consumers, inflation prospects and subsequently further easing policies to counter-attack any possible setback on the real economic recovery.
In a nutshell, the chances for the Yen short trade to make a comeback appear to be now directly related to the decision made on the sales tax hike. The softer the approach on the tax, the better the chances for a supposedly self-sustaining recovery, with the consumption and inflation maintaining an upward tendency, therefore, lesser need for more BoJ intervention, which helps maintain Yen strength. On the contrary, an aggressive approach to the sales tax - quite unlikely after the Japan's GDP numbers - forces the BoJ to rethink more easing in order to stimulate the economy, as a result, Yen regains is weakness.
Adam Button from Forexlive sees the performance on Japanese yields, which act as a proxy on the easing levels from the BoJ, as a key ingredient too. According to the Analyst, "without guessing which path the government follows on the sales tax hike, any alternative probably means less tax", which for Button, "that’s good news for Japanese stocks but whether it’s good for USD/JPY depends on how the bond market reacts."
What is next?
The next focal point on the tax sales saga is to keep an eye on the headlines crossing the wires on a daily basis in order to form a more solid opinion on what might be the ultimate outcome. At least, that should be the case until the revised Q2 GDP numbers in Japan are published in early September, only then, a final decision on the sales tax measures will be taken.
As reported yesterday, the big miss in the Japanese growth figures, displaying a -1% negative deviation from 3.6% expected to 2.6% preliminary data, is not helping the case to implement a planned 3% aggressive increase on the sales tax. Historically, there are well-founded reasons to fears that the economy may face some undesirable headwinds. Instead, Japanese policy-makers are growing more vocal on either a more conservative 1% incremental approach on the sales tax, or even delaying the tax hike by one year after Japan's PM Abe Adviser, Mr. Hamada,was quoted earlier yesterday saying "there is no need to hurry with the sales tax hike after the weaker-than-expected Q2 GDP as it might harm the economy."
On the flip side, BoJ Chief Kuroda said last week that it is not necessary a delay in the sales tax hike, saying that “ending deflation and raising the sales tax are achievable at the same time.”
Is this time different?
Bruce Clark from IFR Markets thinks this time is not different for Japan, as they want the market to believe. According to Clark, "Japan's GDP miss confirmed what the JGB market has been hinting at for several weeks, that is, the current iteration of Abenomics probably isn't enough to push an economy beset by enormous demographic and debt headwinds up over the crest of the proverbial hill." In view of Clarck, the decline in Japanese yields "are a sure sign that like the many previous episodes in the past twenty years when the Japanese assured us that 'this time is different', it's most likely not."
The cruel reality well described by Clark above comes at a time when the popular Yen short trade has been losing significant momentum, as the market reached the point of 'enough pricing' from the radical easing measures undertaken by the BoJ. Market dynamics, which tend to vary price tendencies notably as the support towards a particular direction gets heavily overcrowded, documented weekly on the CFTC specs positioning report, is also part of the reasons having burnt out longs late to the party.
Why so much buzz about the sales tax?
If one wonders why the sales tax issue is so widely covered in the FX arena, it all has to do with the potential ramifications it may have on new monetary policies the Bank of Japan may adopt subject to the impact on consumers, inflation prospects and subsequently further easing policies to counter-attack any possible setback on the real economic recovery.
In a nutshell, the chances for the Yen short trade to make a comeback appear to be now directly related to the decision made on the sales tax hike. The softer the approach on the tax, the better the chances for a supposedly self-sustaining recovery, with the consumption and inflation maintaining an upward tendency, therefore, lesser need for more BoJ intervention, which helps maintain Yen strength. On the contrary, an aggressive approach to the sales tax - quite unlikely after the Japan's GDP numbers - forces the BoJ to rethink more easing in order to stimulate the economy, as a result, Yen regains is weakness.
Adam Button from Forexlive sees the performance on Japanese yields, which act as a proxy on the easing levels from the BoJ, as a key ingredient too. According to the Analyst, "without guessing which path the government follows on the sales tax hike, any alternative probably means less tax", which for Button, "that’s good news for Japanese stocks but whether it’s good for USD/JPY depends on how the bond market reacts."
What is next?
The next focal point on the tax sales saga is to keep an eye on the headlines crossing the wires on a daily basis in order to form a more solid opinion on what might be the ultimate outcome. At least, that should be the case until the revised Q2 GDP numbers in Japan are published in early September, only then, a final decision on the sales tax measures will be taken.