Why has the weak-yen cycle ended this year? – Deutsche Bank

The research team at Deutsche Bank came out with their comprehensive assessment on the Japanese currency, explaining the reasons behind the sharp appreciation seen this year.

Key Quotes:

“The USD/JPY pairs the currency of the world's largest debtor nation with that of the largest creditor nation. International financial flows narrow and the JPY is prone to strengthening against the USD during periods of global economic weakness, including the US and Japan.”

“Conversely, the JPY typically weakens against the USD when financial flows between creditor and debtor nations are smooth during upbeat economic conditions.”

“Indeed, the USD/JPY lagged Japan's economic cycle (BoJ Tankan business condition DI) by around 1.5 years on average in past years. US and Japanese economic activity roughly correlates.“

“The policy rate trailed economic activity by a half year to one year in the US, and the USD/JPY lagged by another half year to one year.”

“However, Japan's economic activity often correlates to trends in the US economy, and we could say that the US economy is the main factor determining the USD/JPY market. “

“We observed that the policy rate cycle modestly trails the economic cycle in the US and the USD/JPY moves with a slight lag to this rate trend.”

“Strong correlation existed between the UST 2y yield, a proxy measure of US economic activity, and Japan's economic cycle in past years.”

“The UST 2y yield did not rise at the same pace as the recovery in US economic activity, but it increased at a modest pace.”

“Furthermore, upward momentum in the USD/JPY strengthened at times of increases in the UST 2y yield. The BoJ's QQE1 in April 2013 and QQE2 in October 2014 pushed up the USD/JPY because the US economy was healthy at the time.”