By: Mr. Vaqarjaved Khan, Research Analyst, Angel Broking Ltd
Since the start of 2020 till date (4th September 2020), the USDJPYpair has lost value by 1.77 percent while JPYINR has depreciated by around 3.96 percent.Dollar index has declined by 3.87 percent in the same time frame.However, since the start of August USDJPY has gained in value by 0.22 percent and JPYINR has appreciated by 2.74 percent during the same time frame.The recent appreciation in JPYINR can be accredited to risk appetite improvement in global investors on hopes of new plasma therapy treatment for Covid-19 patients being approved by US FDA.
Japan’s GDP contracted by 27.8% in Q2 2020
Japan’s economy contracted by 27.8 percent on an annualised basis in Q2 2020 compared to the previous quarter. This was the sharpest contraction for the country on record as economic activity was restricted under the state of emergency during the coronavirus outbreak.
However, even before the spread of the virus the economy was affected by the US-China trade spat and a consumption tax hike last year. Damage to the Japanese economy deepened when the Central Government declared a state of emergency in April.
Japan has been major exporting nation for cars and auto parts. Global demand for these products was dampened during hard lockdowns in major cities across the globe. Exports of goods and services including spending of foreign tourists slumped by 18.5 percent during the quarter.
A recent surge in Coronavirus cases in Japan has made people more reluctant to venture out and could possibly hamper the economy going forward. Japan was the initial few nations to get the virus under control but a second wave of virus started in the nation since the start of July. On 3rd August daily number of cases for the country peaked at 1998. Since then the country has been recording nearly 1000 cases every day.
BOJ to maintain its ultra-easing monetary policy
The Bank of Japan in its latest meeting warned that the domestic recovery from the economic impact of the pandemic would be modest and could be delayed and how long it would take to control the outbreak.
Years of ultra-low interest have also strained commercial banks increasing fears that further rate cuts could backfire and hamper the lending capacity of the banks going forward. But BOJ have pledged that they would maintain their credit support going forward as well because credit flows to the businesses remain a key a key priority for the Central Bank.
Outlook
Risk sentiment across the globe can be seeing picking up on US FDA’s approval for treatment of coronavirus patients. Despite the improvement in risk real economic recovery is still little farfetched as daily number of cases across the globe continue to rise. Also, India has exceeded US in the daily number of cases with more than 80000 daily cases in the last couple of days.
In midst of the pandemic, Shinzo Abe has decided to step down as the Prime Minister of Japan citing health reasons. Shinzo Abe was the longest serving Prime Minister in Japanese history.
Initiallymany countries who were able to get rid of the virus initially including Japan are seeing a second wave of virus in their countries and hence the expectations of V-shaped recovery for these countries will get effected.
The pendulum of economic recovery and risk appetite lies in the hands of vaccine makers. Earlier the world gets the vaccine the faster can be the global economic recovery.
Hence, JPYINR(CMP: 69) is likely to move in the range from 68 at the lower end of the spectrum and 70 at the higher end of the spectrum by the end of Sep’20.
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