It seems clear that Japan is signaling its intention to stand pat with monetary policy, content to watch how the second quarter plays out. This introduces a risk (or opportunity) that the Yen may regress from the weakening experienced over the last year. Our models--which have done a decent job capturing the effects of US and Japan monetary policy--indicate that the opportunity exists for a stronger Yen. We compare the relative size of each central bank balance sheet, making projections about expected central bank purchases. In the chart below, in our low estimate, we assume Japan follows through with its 70 trillion Yen promise, that the Federal Reserve maintains its taper trajectory and that this relationship is calibrated at 100 Yen. In our high estimate, we assume the Bank of Japan doubles its asset purchases (which after today seems not immediately forthcoming). This approach suggests the Yen could strengthen back to 90 and still be within the boundaries of our model.
We say above that the a strengthening Yen is a potential opportunity because: 1) there are sectors and industries that outperform in a rising Yen environment and 2) these areas have underperformed since the onset of QE. The MSCI Asia-Pacific consumer staples sector has the highest correlation to the Yen of all sectors in the MSCI Asia-Pacific index.
Within that sector, beverages, food retail and food producers have the highest correlations to the Yen.