International | Sep 05 2006
By Chris Shaw
The revisions to CPI numbers recently undertaken by the Bank of Japan (BoJ) resulted in a lower than expected outcome, the market’s reaction being to price in a revision to the timing for future interest rate increases in the Japanese market from this year to early next year.
This meant expectations for a closing of the yield gap between Japan and the US have also been pushed into next year, which has seen the yen weaken against the US dollar. ANZ Bank was one to adjust its expectations along these lines, as having previously expected a rally in north Asian currencies by the end of the year it now sees this as less likely.
This has led the bank to cut its year end forecast for the yen against the US dollar to 111, against a previous estimate of 107. Further gains are expected next year, the bank forecasting a yen/dollar rate of 108 by June 2007 and 105 by the end of September next year, compared to a current level of around 117. By way of comparison, Bank of New Zealand forecasts a yen rate of 110 by the end of December and Nikko Citigroup is forecasting a rate of 112.
Trading in the past couple of days would indicate this view is again changing though, as the yen has strengthened slightly on renewed potential for a further rate hike by the end of the year. The release of data showing Japanese companies have lifted spending to their highest level in nearly five years has helped and has prompted traders to take positions before the BoJ meets later this week.
Despite changing its currency expectations the ANZ has retained its positive view on the outlook for Asia generally, noting even if the US economy were to slow down as per market expectations the impact on growth in the region is likely to be limited. This reflects both the growing importance of Europe as a trade destination for Asia (it now accounts for the same level of exports as the US), as well as a growing inter-dependence throughout the Asian region.
It accepts growth in China may moderate slightly, though it is still forecasting GDP growth of 9.5% by year-end, which is still quite strong. The Japanese economic outlook also looks positive in its view, as while some data suggests a softening the bank’s reading is the economy is continuing to expand. It does expect a more sustained flow through from the strength in the corporate sector to the household sector, which to date has been somewhat erratic.
Such performance supports its revised yen forecasts, but has implications for other currencies in the region. A lower yen takes away some of the support other north Asian currencies such as the Taiwan dollar and Korean won could have expected, so forecasts for these currencies have also been revised down. The bank had previously forecast a rate of 30.50 for the Taiwan dollar by year end but now expects 32..00, while for the won the old forecast of 950 has been adjusted to 968.
