Forex Flash: USDP/JPY upside possible with more accommodative BOJ – UBS

According to Research Analyst Gareth Berry at UBS, “The prospect of a more accommodative Bank of Japan is certainly a good reason to position for further USD/JPY upside, though it is not the only one. The FX flow picture has started to change too in ways that are potentially more far-reaching and long lasting. Deep structural changes are taking place in Japan's real economy, which has disrupted the prevailing balance between supply and demand in the foreign exchange market. Corporates, as a community, had been persistent net sellers of USD/JPY for years, but then suddenly switched sides two years ago. We have seen persistent net yen selling since.”

Outbound Foreign Direct Investment by Japanese corporates plays its part in generating a portion of the yen selling pressure. However, this has been a feature of the flow landscape for years, and the pattern has not changed enough to fully explain the shift in flow dynamics. “It is no accident, we believe, that Japan's trade balance swung into deficit shortly before our flow data detected the shift in the balance of flows. The March 2011 earthquake not only disrupted Japan's export machine, but also crippled the country's nuclear power industry, increasing the reliance on imported fuels as a substitute.” Berry adds.