Boo hoo! The Japanese yen got clobbered by its higher-yielding counterparts as risk appetite surged yesterday. Its only win was against the safe-haven U.S. dollar as USD/JPY closed 4 pips below the 76.00 handle. Read on to find out whether the yen could get back on its feet today or not.
The announcement of the euro zone debt deal, along with strong economic figures from the U.S., brought risk appetite back in the markets yesterday and led traders to dump the lower-yielding Japanese yen. It didn't help that Japan was off to a poor start as they released weaker than expected retail sales data during the Asian session. The report showed that consumer spending dipped by an annualized 1.2% in September instead of staying flat. Now that can't be good, considering retail sales already slipped by 2.6% year-over-year during the previous month!
That was probably why the BOJ decided to keep interest rates at their current low levels during their monetary policy decision. They even decided to add 5 trillion JPY to their asset purchase program in order to boost the Japanese economy. However, this was actually a disappointment for some market participants since they expected more aggressive action from the central bank. Some were even counting on a currency intervention since USD/JPY is lingering at its post-war lows.
The BOJ also downgraded their growth forecasts as they now expect the Japanese economy to expand by only 2.2% in 2012 versus the previous forecast of 2.9%. This year, they're expecting a mere 0.3% GDP growth instead of the original forecast of 0.4%. Inflation expectations were also lowered to account for the negative effects of the rising yen on their domestic economy.
Fresh off the press are the household spending, CPI, and industrial production data. The September household spending report chalked up a smaller than expected decline of 1.9% year-over-year versus the consensus of a 3.4% dip. This was also much better compared to the 4.1% slide seen in August. Another notable improvement was the drop in joblessness from 4.5% to 4.3% in September.
However, the Japanese industrial production report came in worse than expected and showed a 4.0% drop, double the projected 2.0% decline for September. These mixed data could dull the yen's shine again today, but watch out for any shifts in risk sentiment to know whether the safe-havens or higher-yielders would end the day with a win.