Oil shocks hurt Japan, but consequent risk aversion could still help USDJPY
With the crisis in Iraq showing no sign of abating, the global economy is bracing for a period of elevated oil prices – hardly welcome while individual countries are still growing below trend. In addition, central banks in particular will have to manage challenges relating to counter-cyclical price shocks as headline and core inflation diverge for the worse. Japan is uniquely exposed given its deep reliance on energy imports, compounded by the adverse inflation dynamics induced by Abenomics. Strong (equity-driven) risk aversion could follow any worsening in economic expectations for Japan, but we still believe being long JPY is the wrong trade for such a scenario.
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