JPY Forecasts: The 'Martini Index'

JPY Forecasts: The 'Martini Index' Is At Extremes - SocGen
06 Dec 2014 00:21 EDT
By eFXnews.com
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Focus of the day:

"The trouble with using currency debasement to boost inflation expectations is that it only works temporarily. On almost any valuation measure the yen is already very cheap, but lower oil prices are dragging inflation back down and pressure for monetary easing will return, leading to a weaker yen in the New Year. In the very long term, EUR/JPY will fall sharply if ‘Abenomics’ delivers economic recovery, but in H1 2015, the yen may fall as fast as the euro.

Yen weakness is part of the ‘Abenomics’ package of measures that it is hoped, will drag the economy away from deflation. But the longer it takes to work, the more the BOJ has to expand its balance sheet and weaken the yen, in order to prevent inflation expectations from drifting back down. This buys time for the implementation of structural reforms to labour markets, corporate governance, pensions and so on. If this works, the yen will be very, very cheap when the economy gets to a sustainable path, particularly against the euro.

We won’t know for years rather than months whether Abenomics will succeed. In the meantime, the USD/JPY is overshooting to the upside. But don’t be surprised if we start warning of long-term trading opportunities shorting the euro against the yen. The martini index is at extremes.