US taper in 2014 will be a tailwind for the yen exchange rate



While the US slows and eventually stops QE (quantitative easing), Japan will continue and likely increase QE

In Part 1 of this series, I made the case that the BoJ (Bank of Japan) will likely step up its monetary easing, as current efforts haven’t led to the level of inflation it’s targeting. At the same time, the US is likely to taper in 2014 and may even completely halt asset purchases by the end of next year. If the Fed does so, Japanese corporate profits would benefit from the lower exchange rate caused by a stronger dollar.


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The Fed is itching to taper—despite current fiscal problems in the US

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Several members of the Federal Reserve Board of Governors wanted to taper in September. The decision to delay was close and partly influenced by the economic risk of another debt ceiling showdown. Once this fiscal headwind is past, the Board of Governors will likely go back to favoring a sooner taper. A big factor here is the voting rotation in 2014, which will replace some doves (members who favor more loose policy) with hawks (members who favor tighter policy).

On the other hand, Japanese fiscal policy could be bullish for Japanese equities

The Japanese government announced a consumption tax hike earlier this year, which is likely to be paired with a corporate tax cut, as evidenced by Japanese Finance Minister Taro Aso, mentioning that the upcoming fiscal package could include tax cuts in addition to other fiscal stimulus. The consumption tax hike will be a revenue headwind, but a decreased tax burden will fall straight to the bottom line for Japanese equities.


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