In the 12 months to August, the Japanese current account surplus remained close to a 15-year low, net portfolio investments turned negative for the first time since May 2011 and net foreign direct investment outflows were near a record high. “However, this is not necessarily negative for the yen against the dollar,” says Harvinder Kalirai, chief strategist at BCA.
| Rate differentials between US and Japan negligible |
 |
| Source: BCA Research |
He points out Japan’s basic balance - current account plus long term capital flows - deficit of 1.6% of GDP is only half the size of that of the US. In addition, Kalirai adds, net portfolio flows to Japan should improve.
Kalirai believes Japanese investors will be reluctant to recycle their excess savings into overseas assets as interest rate differentials between the US and Japan are negligible.
“Historically, Japanese investors have required a minimum 400bps of additional yield as compensation for assuming currency risk,” he says.
“With the Federal Reserve committed to holding rates near zero until mid-2015, interest rate differentials will remain bearish for USDJPY for quite some time.”
Also, Kalirai adds, the Bank of Japan will be less aggressive than the Fed and European Central Bank in expanding its balance sheet, which will push USDJPY and EURJPY lower.
“But most importantly, the yen will provide portfolio protection during ‘risk off’ periods. Bottom line: maintain long positions in the Japanese yen.”