Daily Economic Commentary: Japan

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Yen crosses rallied yesterday as Japan reported weaker than expected industrial production figures. Higher risk appetite may have also pushed the safe-haven yen lower. As a result, the GBPJPY rallied by more than 400 pips while the AUDJPY reached a new yearly high.

August industrial production was revised downwards from 1.8% to 1.6%, which was much lower than the 2.1% reading in July. This implies that the effects of stimulus programs are slowly starting to fade even as the BOJ upgraded their assessment of the economy. In their monthly report, the BOJ said that Japan's economy has started to pick up even while economic conditions remain severe.

Today, BOJ Governor Masaaki Shirakawa is scheduled to speak at the 46th Annual Meeting of Credit Cooperatives in Tokyo. He could talk about the state of their emergency lending programs which are set to expire by the end of this year.

Meanwhile, earnings reports from the US could continue to affect risk sentiment today and who knows where this would take the USDJPY? Companies such as General Electric and Bank of America are scheduled to release their respective earnings reports during the US session and if the reports print healthy performance figures, then risk appetite could dominate today and push the yen lower.

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The yen lost its appeal for the most part of last week as encouraging earnings reports from the US led investors to favor higher yielding currencies. Both the AUDJPY and NZDJPY touched a new yearly high. The AUDJPY pair reached a high of 84.23 before closing at 83.36. The NZDJPY pair, on the other hand, also stretched to a high of 68.15 before closing at 67.18.

Firms like Apple and Yahoo are scheduled to release their third quarter reports this week in the US. Encouraging profits from these companies can further lift the global capitals markets which could be bearish for the safe-haven currencies like the JPY.

Japan’s economic calendar is relatively light this week. Japan’s trade balance, which will be published on October 21, is seen to expand to ¥0.38 trillion from ¥0.24 trillion. This could give the yen some short term support.

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After the yen’s sell-off last week, the currency managed to gain slightly against the USD yesterday. The USD/JPY pair ended the US session at 90.62, slightly lower from its Asian open price of 90.93.

No economic data due today but expect to see Japan’s trade balance tomorrow at 11:50 pm GMT. Another surplus is expected for September, this time ¥380 billion, which is higher than the ¥240 billion surplus in August. If forecast holds, it would mean that Japan’s export industry is improving and could help the yen gain back some lost ground from last week.

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Yen pairs didn’t close significantly higher or lower from their openings in yesterdays trading session. Was this due to the empty economic calendar? Or are traders gearing up for some big moves? Could we be in line for some explosive action today?

We could see more movement later tonight, as trade balance data is due at 11:50 pm GMT. The balance is expected to have risen to ¥380 billion in the past month, up from August’s figure of ¥240 billion.

Given the relatively quiet moves yesterday, we may see some wilder moves today. Watch out for news from other countries, and be mindful of more earnings reports that are being released throughout the week.

[ForexGump]

Yen crosses rallied yesterday with the GBPJPY leading the pack. However, the USDJPY remains stubborn as it refuses to budge from its sideways movement. It seems that traders are still waiting to see if the recent yen strength has made any damage on Japan's exports and whether this warrants currency intervention soon. The freshly released trade balance data should shed some light on this matter.

Japan's trade surplus narrowed from 0.17 trillion JPY to 0.06 trillion JPY in September as it missed the consensus of 0.38 trillion JPY. Components of the trade balance show that Japanese exports fell at a slower pace during the month as shipments abroad dropped by 30.7%, which is less than the 36% decline in August. Stimulus spending and interest rate cuts were pinpointed as the major factors that helped revive demand. China, which just overtook the US as Japan's biggest trade partner, has also contributed much to the pickup in Japanese trade activity. Hmm, it seems like the recent yen appreciation didn't hurt that bad...

The economic schedule of Japan is empty for today but reports from its major trade partner, China, could drive the yen's price action. China will be releasing its GDP, industrial production, CPI, and PPI all in one swoop at 2:00 am GMT. If the reports indicate that the Chinese economy is still going strong, then this could provide support for the Japanese economy as well. Will we see a yen rally or are traders still concerned about the possibility of currency intervention?

[ForexGump]

The yen surrendered before the other majors in yesterday’s currency battle due to a broad-based confidence in the markets. Fired by encouraging profits from several Dow component firms in the US, investors were prompted to leave the safety of yen for equities and other higher yielding currencies.

No top tier economic report was scheduled in Japan yesterday. China’s economy grew by 8.9%, a shade lower the 9.0% estimate during the third quarter. Higher yielding currencies initially sold off, lifting the JPY for awhile, but investors eventually jumped back in to push the high yielders further up. In any case, the growth in China’s GDP, being the third largest in the world, suggests that the global economy as a whole is in much better position now. This supported yesterday’s buying interest in the global capitals markets.

As mentioned, market participants’ optimism was fueled more by the encouraging profits of several Dow component firms in the US. McDonald’s, AT&T, Merck, and the like all posted some better-than-expected third quarter earnings. As a result, investors favored the equities and the other high yielding currencies over the USD and the JPY.

Today, superstar company Microsoft is scheduled to release its third quarter earnings. Positive results could once again spark another rally in the equities markets which unfortunately could be bearish for the JPY.

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With the exception of the GBP/JPY, investors continued to take JPY crosses higher as the week came to a close last Friday. It seems that the recent JPY run is now over and a new trend is starting to form.

No economic report due for release today but expect to see Japan’s retail sales report for September tomorrow at 11:50 pm GMT. The estimate is that retail sales fell 1.5%. If forecast holds, it would be the twelfth straight month of decline.

Looking further ahead, the Bank of Japan will be holding a press conference on Friday. The press conference is there to communicate to the public the reasons behind their monetary policy as well as the bank’s outlook on Japan’s economy.

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Mixed trading for the Japanese yen in yesterdays trading session. The USDJPY remained steady, closing just 3 pips higher at 92.18, while the EURJPY was a completely different story. The EURJPY dropped over 100 pips to close the day at 137.10. Did the yen benefit from some increased risk aversion?

Newly appointed Prime Minister Yukio Hatoyama delivered his first policy speech since taking office yesterday. In his speech, Hatoyama said that his top priority is to revive the economy. Take note that the new government has pledged to focus more on internal growth as opposed to relying heavily on exports. Some believe that this may be difficult to do, given how the Japanese economy has traditionally been export based. In addition, critics point to the growing budget deficit as an obstacle towards rebuilding the economy.

It’ll be interesting to see how quickly Hatoyama and his boys can get the ball rolling – remember, the Democratic Party of Japan was able to gather support because of promises of change. If they act too slowly, could confidence begin to sour? Let’s see how this plays out.

Today, retail sales data is expected at 11:50 pm GMT. The report is expected to show that retail sales have fallen by 1.5% from levels a year ago. This would be a slight improvement from August’s figures, which showed a 1.8% year on year decline.

[ForexGump]

The JPY was on a roll yesterday as it ended higher against the USD, EUR, and AUD. Japanese retail sales for September provided support for the JPY since the actual figure came in line with forecasts. Risk aversion, which was caused by weak US economic reports, also boosted the safe-haven JPY.

Retail sales in Japan were down by 1.4% year-on-year in September. This was slightly better than the 1.8% decline seen last August. Sales at large retail stores fell by 5.6%, chalking up its 18th month in consecutive declines. Although the headline figure points at weaknesses in local demand, taking a look at the past month's figures would lead to the conclusion that the indicator is slowly making its way out of a downtrend. The decline in retail sales peaked at 5.8% in February and eased to 3.0% from April to June.

Japan will be releasing its preliminary industrial production data at 11:50 pm GMT today. Industrial production is expected to be up by 1.1% in September. This is slightly less than the 1.6% uptick in August.

Other reports that could influence the JPY's price action today include durable goods orders and new home sales data from the US. Both reports are expected to print improvements over their prior readings, which means that risk appetite could revisit the markets and push the safe-havens lower. But if the actual figures fail to hit the mark and come in much worse than expected, then risk aversion could continue to fuel the JPY rally.

[ForexGump]

The Yen marched ahead of the pack as risk aversion celebrated its home coming party. The weakness in the global equities markets prompted investors to shy away under the comforts of the USD and the JPY.

A lot of investors decided to wait in the sidelines ahead of the release of US’s third quarter GDP tally. Apparently, they were quite unsure if the 3.2% expansion in the US economy was met. Tension was further aggravated when new home sales in the US dropped to 402,000 from 443,000 in September. This caused a broad-based selling in the markets which led investors back to the safety of the USD and JPY.

Earlier today, Japan printed a 1.4% gain in its industrial production for the month of September. Japan’s manufacturers have been benefiting from an increasing demand in Asia, particularly in China which posted an 8.9% GDP growth n the third quarter.

The Yen got some additional boost following the release.

As mentioned, the US is slated to release its third quarter GDP result. The US’s economy is seen to have expanded by 3.2% after contracting by 0.7% during the previous period. A worse-than-expected score could trigger another run of risk aversion which would be beneficial for the JPY.

Japan, on the other hand, will release several high impact reports at 11:30 pm GMT today. Japan’s unemployment rate for the month of September is projected to have worsened to 5.6% from 5.5%. Household spending for the same period is also seen to slow to 1.0% from 2.6% while the annualized Tokyo CPI is still expected to print a negative score of -2.0%.

Much attention, however, will be given to the interest rate decision of the BOJ. The time of the decision is tentative. While the bank is expected to leave its rate unchanged at 0.10%, talks have been surfacing that the bank could start lifting its hand from the market due to the resilience in country’s industrial sector. Ending parts of the bank’s QE program would be bullish for the JPY.