Bank of Japan Still Grappling With Deflation, Risk Seeking Likely To Take Yen Lower

The Japanese yen has appreciated quite a bit over the past two months, as risk aversion has pervaded the forex markets and led carry trades to unwind.

However, after a choppy day of trading in the yen crosses, it appears that Fed Chairman Ben Bernanke has somewhat assured investors that he will support the markets in times of distress, which has left the low-yielding currency down slightly from Thursday?s New York close. Starting out next week, Japanese capital spending is anticipated to remain strong, but show a slowdown from the quarter prior, while wage growth is predicted to soften further, which will not bode well for consumer spending. With two drivers of economic growth - business investment and consumption - showing diminishing power, the picture does not look good for Japan. Furthermore, the most recent inflation report showed that the Bank of Japan is still grappling with persistent deflation. The combination of dour economic outlooks and tepid price growth along with continued risk seeking by investors could lead to more steady gains for carry trades and equities next week.

Written by Richard Lee, Currency Strategist of