Daily Economic Commentary: Japan

Trading Discussion News and Economy
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After getting a boost from a glitch that sparked a wild run of risk aversion, the yen gave back its gains last Friday as traders repositioned themselves. Still, with all the uncertainty hanging around in the market, could the yen continue to benefit?

Late yesterday, the Bank of Japan released the minutes of its latest MPC meeting. The minutes revealed that BOJ officials are slightly more optimistic over the state of the Japanese economy. Rumors are that the central bank may add more quantitative easing measures this May, hoping to provide liquidity to potential growth sectors in the Japanese economy.

Ever since the dramatic shift in power in the Japanese government, they have been trying to shift their economy towards internal growth, as opposed to being heavily export dependent. Still this will take time, and the Japanese economy will remain heavily influenced by developments in other countries like China and the US.

Looks like the economy calendar will be relatively empty the next couple of days, so once again, let me warn you to be cautious and to keep an eye out for developments in risk sentiment.

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The Japanese yen was off to a weak start yesterday as euro zone’s “Mega Rescue Plan” brought risk appetite back in play. On top of that, rumors that the BOJ is considering more quantitative easing measures put more downward pressure on the yen.

First, here’s the lowdown on the proposed measures for additional liquidity. The BOJ is thinking of reopening its US dollar swap agreement with the Fed and other central banks. With the goal of pumping up liquidity in the market, this move could prevent the fiscal crisis from spreading all over the globe. Other central banks, such as the BOC and ECB, have taken initiative in reviving liquidity and lending so the BOJ decided to follow suit.

Looking at the economic schedule, well, Japan has a report-free day today. But that doesn’t mean that the yen’s price action would be any less exciting. Although the euro zone seems to have averted a full-blown crisis with its massive rescue plan, news on their debt problems could still have an impact on risk sentiment. Stay on your toes!

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The lack of any hard-hitting economic report caused the yen to trade mixed against most major currencies yesterday. The currency ended the day hardly changed against the pound, but higher versus the euro and the dollar.

The economic data to watch for today is Japan’s leading index at 5:00 am GMT. Although the report has little effect on price action, it provides a little piece of Japan’s fundamental economic picture. It is expected to print a reading of 99.3 for March, which is a welcome improvement from the previous month’s 98.5 reading.

Well, that’s about it for Japan. I’d keep an eye out for the GBPJPY though, as the Bank of England Monetary Policy Committee is scheduled to have a press conference later. Historically, the event has created a lot of volatility in the pound pairs.

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With volatility drying up, the yen pairs found themselves consolidating within tight ranges. Could we be in line for some breakouts soon?

The leading indicators report came in to beat consensus, printing a score of 102.8. This represents a nice bump up from the previous month’s score of 98.5 and marked the highest score since mid 2008. The increase in the index was attributed to a rise in export demand. I’m a little skeptical though, whether this can continue. Remember, China has been making moves to dampen the growth of their economy. With China being one of Japan’s major trade partners, let’s see how this develops as we hit the mid point of 2010.

No high impact data on deck today, but seeing as how yen pairs have been consolidating, all it would take is some news to shift risk sentiment and we could see some wild swings in the currency markets. Watch out for news coming out of Europe – if concerns regarding both the UK government and euro zone bailout plans spark risk aversion, we may just see the yen rally once again.

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With risk aversion as its ally, the Japanese yen was able to rack up huge gains against its major counterparts yesterday. It even ended higher than the US dollar as the USDJPY sank below the 93.00 mark and closed at 92.80.

Only the Economy Watchers’ sentiment report was released from Japan yesterday and it showed that, although workers were still pessimistic with their economic assessment for April, their sentiment improved during the month. The reading for April climbed a few notches from 47.4 to 49.8, implying that workers are less pessimistic about economic conditions in Japan.

Japan won’t be releasing any economic data today but keep an eye out for the top-tier reports from the US since these could impact risk sentiment. The US is set to release its retail sales, industrial production, and consumer sentiment reports later on so stay tuned!

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The yen turned out to be one of the winners last Friday, posting some significant gains against its western counterparts. The EURJPY, for one, ended the US trading session that day at 114.30, almost 200 pips from opening price during the Asian trading session.

What else could’ve caused the move but good ol’ risk aversion? Although the yen isn’t a technically a safe haven currency, it is one of the best funding currencies when it comes to doing carry trade. This means that during times of economic uncertainty, when investors start unwinding their carry trades, the yen strengthens.

For this week, we’ve got a couple of important economic data on Japan’s cupboard.

The first one will come out Wednesday in the form of a GDP report. It is expected to show that the Japan’s economy expanded 1.4% during the first quarter of this year, which is a welcome addition to the 0.9% growth seen the quarter before. Given the yen’s price action in the past couple of days, better-than-expected results on the report could provide more fuel for the yen bulls to take the currency higher.

On Friday, at 12:00 am, the Bank of Japan will announce its decision on interest rates. It is widely expected for the bank to keep rates unchanged at 0.10%, so traders would probably shift their focus to the accompanying statement.

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With no major data release, the yen bobbed its head to some reggae music and chilled out for the better part of yesterdays trading sessions. The USDJPY stayed within its average true range, while there weren’t any sustained moves on cross pairs. Could we see a breakout soon?

No high impact reports on todays economic calendar, but look out for data coming out from Europe today. UK CPI reports and the euro zone ZEW economic sentiments surveys are due starting at 8:30 am GMT. These normally cause quite a ruckus in the markets, so be careful!

Aside from those reports, you should be aware that risk sentiment is driving the market right now. If we continue to see traders cower in fear each time more bad news regarding the EU bailout plan comes out, which normally leads to traders covering their short positions in the yen. Remember, the yen has been used as a funding source because of its low (CHEAP!) interest rate. Thus, whenever traders unwind their positions in higher yielding assets, the yen tends to benefit.

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“Banzai!” yelled the Japanese yen as it emerged as the strongest performing currency yesterday. Thanks to the return of its old buddy risk aversion, the yen won back its Monday losses and more!

The latest news from the euro zone caused risk aversion to revisit the markets yesterday, pushing yen crosses back down. The yen was also able to get another boost from Japan’s strong household confidence report, which printed a rise from 40.9 to 42.0. Although the actual figure missed the consensus by a couple of points, it was still able to chalk up its fourth consecutive monthly increase. Components of the report suggest that fears of further job losses and wage cuts have subsided and that inflation is expected to pick up later on. Could Japan be bidding sayonara to deflation soon? Hmm, that may take a long while…

In the meantime, let’s take a look at the upcoming economic reports from Japan today. Their revised industrial production figures are set for release at 4:30 am GMT and this report could show a 0.4% uptick in production for March. Later on, Japan’s preliminary GDP report is due at 11:50 pm GMT. Japan is expected to post a 1.4% economic expansion for the first quarter of 2010. Take note that the growth figure from the last quarter of 2009 was revised downwards from 1.1% to 0.9%. Would we see a better than expected figure this time?

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Did you see how naughty the yen became yesterday? It soared early on in Asia, reversed its gains during the European session, and then rallied again when the US trading session went underway!

As Forex Gump called out in his article, the weaker-than-expected results of Japan’s preliminary GDP report led to a wide-reaching case of risk aversion early on during the Asian session. The preliminary report revealed a 1.2% growth, instead of 1.4% like initially predicted. This caused traders to unwind their carry trades, which consequently caused the yen to soar.

As the day went by, the yen started to reverse its gains, but eventually soared when risk aversion hit the markets again when the both the initial jobless claims and the Philadelphia manufacturing index from the US failed to meet expectations.

For today, the only red flag on Japan’s economic calendar is the Bank of Japan’s interest rate decision. It is widely expected for the bank to keep rates steady at 0.10% so traders would probably shift their focus to the accompanying statement. As of the moment, the BOJ’s main concern is tackling deflation as it is putting serious downward pressure on their economic growth. Let’s hear out what the bank has to say about the issue later, as it could cause the yen’s rally to either reverse or follow through.

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The yen’s rally was cut short last Friday as it remained range-bound against its counterparts. What made the yen pairs pause from their sharp dives?

It turns out Japanese policymakers are starting to worry about the effects of the recent yen appreciation. Finance Minister Naoto Kan even tried to verbally intervene in the markets by saying that he would ensure that the yen would not rise excessively. He also remarked that it is undesirable for exchange rates to move far away from their normal levels since this could hurt Japan’s exports. Fears of an actual currency intervention then forced traders to ease up on their yen buying.

The BOJ also released its monetary policy statement last Friday but it turned out to be a non-event. As expected, the central bank kept rates on hold at 0.1%. BOJ Governor Masaaki Shirakawa also outlined plans to boost lending in order to spur economic activity.

This week, keep an eye out for Japan’s inflation reports, which will be released on Thursday. After chalking up a 1.9% annualized drop in prices for April, the Tokyo core CPI is expected to post a 1.5% decline in May, suggesting that deflationary pressures are starting to fade. Also due Thursday are Japan’s household spending and retail sales reports, which would provide a snapshot of their consumer sector. Both reports are expected to post positive readings for the previous month.

Reports to watch out for early this week are the all industries activity index, BOJ monthly report, and the minutes of the central bank’s latest monetary policy meeting. Also, BOJ Governor Shirakawa is set to give another speech by Wednesday so stay on your toes for possible verbal intervention in the currency market.

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Due to the slight case of risk aversion, the yen was once again of the better performing currencies yesterday. The currency clocked in some gains against most of the majors, which included the Aussie, the pound, the euro and yes, even the dollar.

The Bank of Japan’s monthly report yesterday revealed that the ongoing debt problems in euro zone are posing some risks to its economic outlook. According to the report, euro zone’s troubles could indirectly affect other major economies, pull down their respective equity markets, and put downward pressure on global demand for Japan’s exports.

For today, at 11:50 pm GMT, watch out for the release of the minutes of BOJ’s most recent monetary policy meeting. The meeting minutes usually garner a lot of attention from traders because it gives them an inside look into the economic factors that affect bank’s interest rate decisions.

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Up and down day for the yen, as it bobbed its head to a nice slow rhythm. Lows on both the GBPJPY and EURJPY held, while the USDJPY remained within a relatively tight range. What could be in store for us today?

There were no majors reports released yesterday, but there was a lot of rumblings coming out of Asia. On the mainland, tension is building up between North and South Korea. Some believe that this was the cause of the initial gains of the dollar and yen during the Asian and European sessions. However, those were put to rest when the yen gave back its gains later in the day.

Once again, no reports on the economic calendar today, but it’d be a good idea to keep a tab open on news coming out of Korea. If tension spills over, it’ll be interesting to see what prevails - fundamentals or risk sentiment. Normally, bad news so close to a country has a contagion effect, causing traders to shy away from the local currency. However, given how risk flows are dominating traders’ mindsets, will political turmoil cause even more unwinding of riskier assets?

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Despite the recent blasts of risk aversion, the yen seemed to be snoozing and was unable to take part of the excitement. Traders were probably uneasy with buying up the yen given the ongoing tension in Korea, which is just a stone’s throw away from Japan.

Economic data from Japan was relatively light yesterday, with a couple of low-key reports on deck. Minutes from the BOJ’s latest monetary policy meeting showed that central bank officials were wary about their involvement with capital allocation to firms. According to them, this could undermine the credibility of the central bank. I guess the BOJ is just trying really hard to spur lending and economic growth that they go beyond the line of duty…

Meanwhile, the corporate services price index posted a 1.1% decline for April. This marks the indicator’s nineteenth consecutive drop, confirming that deflationary pressures are still present in the Japanese economy. Well, that explains why the BOJ is going all out in its efforts to boost economic activity.

More inflation reports are due later today. These are the Tokyo core CPI and Japan’s national core CPI, which are expected to post annual declines of 1.5% and 1.3% respectively. A couple of reports on the consumer sector are also due today. The household spending report could show a 2.5% year-over-year increase for April, which is much less than the 4.4% rise seen last March. The retail sales report could also churn out a weaker figure for April, posting only a 3.7% annual growth compared to the 4.7% increase in March. Yikes, it looks like deflation is starting to take its toll on the Japanese economy…

Worse than expected figures could result to yen weakness so watch out for those reports at 11:30 pm GMT.

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Due to a rally in global equity markets and increased appetite for risk, the yen found itself dumped by currency traders in favor of higher-yielding currencies. The yen ended the US trading session lower against the pound, the euro, the Aussie, and yes, even the Greenback.

The main catalyst for risk taking, as I’ve said in my other updates, was the China’s assurance that it has zero plans of reevaluating its European debt holdings. No changes were done in their foreign exchange holdings, and that the rumors going around had no basis whatsoever.

Earlier today, some consumer data showed that Japan is still knee-deep in deflation. The Tokyo consumer price index, which measures average change in price of goods and services in the country’s capital, revealed that prices fell once again this month. It recorded a drop of 1.6%, which was slightly higher than the 1.5% drop initially predicted. Consumer spending was likewise lower. Household spending year-on-year apparently declined 0.7%, opposite the 2.5% increase forecast.

Remember, deflation isn’t good for the economy because it cuts on company revenues. Low or declining profits prevent companies from investing and hiring, consequently putting downward pressure on economic growth.

So, what’s next for the yen? Well, whether or not this risk appetite trend will continue is up for debate. Both the S&P 500 and the DJIA continues to trade below their respective 200 simple moving averages, which will cap any serious rallies. Since risk sentiment has been the primary driver of price action in the FX market, this means that the overall trend is still buying the dollar and the yen.

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Renewed risk aversion once again boosted the yen against higher yielding currencies in Friday’s matchup. Despite the release of any high impact economic reports, word that Fitch downgraded Spain spread like wild fire, causing traders to unwind their positions in higher yielding currencies like the euro and pound.

Lo and behold, risk sentiment continues to be the major market theme right now. Even with Japan releasing some disappointing economic figures released last Friday, the yen was able to come out on top.

Even though risk aversion continues to weigh heavily in the markets, the economic data released shouldn’t simply be ignored. The numbers showed that not only is Japan stuck in its deflationary spiral (inflation at -1.5% y/y!), but reports indicated worsening employment conditions, as the unemployment rose to 5.1% in April, up from 5.0% in March. This marked the second month in a row that unemployment climbed. Is this the beginning of a new trend? I hope not!

Although, what took the biggest hit last April was real household spending, which has now fallen by 0.7% on an annualized pace. This is a far cry from the increase of 3% that economists had earlier forecasted. Analysts believe that if domestic demand stays weak, it could greatly slow down the country’s recovery.

It seems like the only good news that came from Friday’s releases was the retail sales data, which showed that sales are up 4.9% from a year ago. This was much higher than the 4% that was forecasted. If retail sales growth remains healthy, it might just be enough to keep the economy on course for a rebound.

Yen traders, be on the lookout for a couple of potentially high impact reports coming out this week. Starting the week off this Monday, Bank of Japan Governor Shirawaka is scheduled to get onstage at 3:20am GMT. This could give us clues as to how the government plans to combat the pressing problem of deflation.

On Wednesday, the capital spending report will be available and is expected to show an 18.5% decrease for the first quarter. Capital spending is a good indication of corporate expansion and it says a lot about an economy’s growth potential. Are Japanese corporations like Toyota ready to make a comeback? Stay tuned!

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The market didn’t witness much Samurai-swingin’ action as the yen found itself giving up some ground versus other major currencies yesterday. Both the euro and the dollar posted some gains against the yen, with the EURJPY and USDJPY rising to 112.0 and 91.28 by the end of the day.

The combination of increased risk appetite and worsening political tension caused traders to abandon the yen in favor of other currencies. Prime Minister Hatoyama made a lot of Japanese upset when he approved the relocation of a US base in Okinawa. Severe voter gloominess may result to the ruling party in the Parliament to lose its position. If this happens, the government could experience more instability as it deals with Japan’s debt and spending cuts.

Nothing is on Japan’s schedule today, but do keep yourself updated on the political happenings in the country as it seems to be the primary driver of the yen’s price action lately.

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The JPY was able to ride on the coattails of risk aversion that kicked in during the European session, clocking in wins against the EUR and CAD. However, as its winnings we’re short lived and the JPY is losing out as I write this!

In the past, the yen has benefited from the risk aversion as traders unwind their positions in riskier assets. Remember, because of a low interest rate, the yen is used as a cheaper source of funding. However, the last few days we have seen the yen struggled to keep its gains, as political news dominates the Japanese landscape. As long as this continues, the yen may continue to take some hits despite risk aversion being the dominating market theme. It looks like fundamentals still play a role in the currency markets!

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The yen turned out to be the biggest loser in yesterday’s trading session. The combination of weak underlying fundamentals and the resignation of Japan’s Prime Minister Hatoyama were the main reasons for the yen’s fall.

Data released earlier today showed how badly Japan’s economy is faring. Capital spending, which is typically considered as a leading indicator of economic growth, dropped by 11.5%, much worse than the 9.5% decline initially expected. This marked the twelfth month of decline, which indicated that businesses had a hard time making new investments to increase production capacity.

Wait a minute… isn’t the yen supposed to gain  during times of uncertainty? Given the recent developments in Japan’s political arena,  some analysts, including our very own [Forex Gump](http://www.babypips.com/blogs/piponomics/japan_gets_three_ds_on_its_rep.html), are saying that the yen may  lose its appeal as a funding currency. At the end of the day, fundamentals do matter, which means that waves of risk aversion may no longer be  beneficial for the yen!
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The yen continued its kamikaze dive yesterday as Japan’s political uncertainties weighed the currency down. After a brief pause around the 92.00 area, the USDJPY zoomed up to a high of 92.81.

Japan didn’t release any economic reports yesterday, leaving the yen heavily influenced by the events in the political arena. Now that former Prime Minister Yukio Hatoyama has stepped down from his post, Deputy Prime Minister Naoto Kan would probably take his place and be tasked to come up with a solution to Japan’s deficit problems. However, with the Okinawa air base issue still unsettled, economic concerns may have to take the backseat for a while, discouraging traders from buying up the yen. Aside from that, rumors that Kan favors a weaker yen made it even less appealing.

No economic reports are due from Japan today but keep an eye out for the release of the US non-farm payrolls report which could spark extra volatility in the markets. Also stay tuned for updates on Japan’s political situation since these could determine the direction of the yen.