On TPP, BOJ And The Japanese Yen

12 countries, most notably the US and Japan, signed in principle on the Trans Pacific Partnership (TPP) agreement, that is expected to enhance trade within a region where 40% of world trade already takes place. 

While we don’t officially know what is inside this secret agreement, it certainly has political impact for Japan. But this may go both ways. 

USD/JPY has been one of the most frustrating currency pairs of late, hugging the 120 level and remaining amazingly stable in comparison to movements in other currencies. Speculation about the timing of the first rate hike from the Federal Reserve and the potential of further Quantitative Easing (QE) from Japan have been suspiciously ignored by markets.

Yet the longer this stall in prices continues, the larger the potential move. Is the yen set to weaken or strengthen? This massive trade agreement can certainly make the difference.

Why the JPY could strengthen on TPP

The argument for an appreciation of the yen goes as follows: Japan needs this agreement more than any other country, to boost its exports and also to stir the local economy, including with more consumption.

As the secretive deal was signed in principle, it needs to be ratified by national parliaments, including the ever polarized US Congress. And Congress is not detached from the presidential primaries.

In both Democrat and Republican camps, there has been criticism on the agreement from the leading candidates. Hillary Clinton showed reservations regarding the deal with concerns on about workers’ rights. And Donald Trump always promises he can get a better deal.

If the Bank of Japan introduces new monetary stimulus via a third round of QQE (after moves in April 2013 and October 2014), this would consequently weaken the yen.

And what happens when China and Japan see their currencies weaken? US politicians jump and call foul, labeling the second and third largest global economies as currency manipulators. Curiously they never said anything about Switzerland’s outright peg and seem to ignore the effect of the 3 Made in America QE programs that have hit the dollar hard.