Daily Economic Commentary: Japan

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.

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.

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.

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.

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?

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.

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.

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.

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.

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.

The yen got clobbered yesterday as risk appetite revisited the markets in full force as the US GDP report showed growth for the first time in more than a year.

With this new development, would we see more yen selling in the following couple of days? Perhaps, especially seeing how risk sentiment has been driving the yen’s price action for the majority of this year.

Japan’s improving labor conditions could provide even more fuel to the fire. The labor market report just released showed that joblessness in Japan eased to 5.3% in September from 5.5% in August. The forecast was that joblessness would increase to 5.6%.

Despite the improvement in the labor market, consumer spending remains subdued and continues to put downward pressure on inflation. The household spending report only printed a 1% increase, lower than the 1.2% expected. Meanwhile, the Tokyo core CPI, one of the best measures of Japan’s inflation rate, came out with -2.2%, the sixth consecutive negative number.

On tap today is the Bank of Japan’s decision regarding interest rates. As I mentioned above, inflation isn’t really a problem for the country so the BoJ would probably keep interest rates steady at 0.10%. There really no reason for a rate hike, especially since recovery still isn’t certain. Traders would be focusing more on the accompanying statement and hear out what the BoJ has to say about the yen’s recent strength. If the BoJ starts talking down the currency, the yen could be sold off again today.

After losing out the day before, the yen struck back in Friday’s trading session to end the week on top. With the Bank of Japan making their decision on exit strategies, the yen rallied, leaving the USDJPY and EURJPY pairs to close trading at 90.09 and 132.59 respectively.

The BOJ decided last week that it will begin to pullback stimulus by ending its corporate bond and commercial paper purchase program to end by December. They also decided that they will end the unlimited lending program by March 31, 2010 and said there would be no expansion of the program. At the same time, the BOJ kept its main interest rate at 0.10%. It seems that with deflation still a major worry, the central bank will not be looking to increase the rate any time soon.

Once again, the BOJ expressed cautious optimism on its outlook of the economy. The bank pointed out that while conditions remain unstable, there have been recent signs of improvement. According to their estimates, the economy will have shrunk by 3.2% this fiscal year, but will rise by 1.2% in 2010.

Oh yes, before I forget – the new government and the central bank will now be holding monthly meetings to discuss the state of the economy. It seems that the government really wants to put its stamp on the recovery. Could this cause some tension between the two bodies in the future? Something to take note off as they try to work hand in hand to get the Japanese economy back on track.

Yen trading may be decided by degrees of risk sentiment this week, as not much high impact reports are scheduled for release. Just be aware that BOJ Governor Masaaki Shirakawa will be speaking on Wednesday at 2:30 am GMT at an economic forum. Traders and investors will probably listening to what he has to say, so be wary of any reactions to his comments.

The JPY was scolded by its partners (USD, AUD, EUR, and GBP) as Japanese stocks yelled “Kamikaze!” and plummeted at their steepest pace in a month. Also, trouble seems to be brewing in their labor market as labor cash earnings marked their sixteenth straight month in declines.

Japanese labor cash earnings fell by 1.6% year-over-year in September, after sliding down by 2.7% in the previous month. Although the actual decline was less than expected, it shows that Japanese firms continue to implement wage cuts even as they increase hiring. Some speculate that the rising JPY is one of the major reasons forcing companies to adopt such cost-cutting measures.

Today, Japan’s economic calendar has the monetary base report due and this is not expected to have a big impact on the JPY’s price action. After rising by 4.5% year-over-year in September, Japan’s monetary base could post another increase this time. Meanwhile, no high-impact reports are due from the US today, which means that we might see a relatively quiet trading day.

Like most of the other majors, the yen was virtually directionless in yesterday’s foreign exchange wars. It closed somewhat higher over the AUD, CHF, and EUR but closed a bit lower than the CAD, GBP, NZD, and USD.

Japan’s monetary base was up by an annualized 4.4% in October to ¥92.86 trillion. The account, which measures the change in the total quantity of domestic currency in circulation and CA deposits held at Japan’s central bank, is said to be positively correlated with interest rate since an increase in the supply of money usually translates to more spending down the road. Though, a hike in the BOJ’s interest rate is very remote these days given that the country is ailing from deflation.

Today, BOJ Governor Masaaki Shirakawa will issue a speech in Tokyo at 2:30 am GMT. Last week, the BOJ left its interest rate at 0.10% while deciding to end its corporate debt buying program this year. His speech could give us more information regarding the bank’s recent consensus.

Meanwhile, the Fed will also have its interest rate decision today at 7:15 pm GMT. The bank is widely seen to leave its interest rate at 0.25%. Though like the BOJ, it could already decide to end its QE program especially now that its economy has expended by 3.5% during the third quarter. Such will be bullish for the USD and probably the JPY as well if indeed they decide to end their debt buying facility.

The yen was sold-off furiously as risk appetite came back in full-force in the markets yesterday. The yen’s demise was caused by the rally in global equities as well as the increase in price of oil and gold. The IMF also added more fuel to the already growing risk appetite when they upgraded their outlook on China’s GDP.

  The BOJ’s [monetary policy meeting minutes](http://www.babypips.com/forexpedia/Bank_of_Japan_%28BOJ%29_Monetary_Policy_Meeting_Minutes) released a few hours ago revealed that the bank would maintain its stance to keep rates low, even if their unconventional stimulus programs start to expire. According to the bank, they need to assure business owners and investors that they would maintain their ultra-accommodative stance with regards to monetary policy especially since recovery is remains uncertain. 

No economic data due today but so expect shifts in risk sentiment to be the primary determinant of exchange rates today.

Bad day for the yen as it simply couldn’t stay ahead in yesterday’s trading. The yen zoomed up against the EUR and GBP, but couldn’t sustain its run and began to lag behind midway through the race. Ultimately, the EURJPY and GBPJPY pairs closed higher for the day at 135.02 and 150.55 respectively.

With no news coming out from Japan, the yen was subjected to risk sentiment in yesterdays trading. The yen appeared to be headed for gains during the early session as risk appetite seemed to dim. However, once the European session rolled around, the currency was at the mercy of other majors. The positive reaction to the BOE and ECB’s rate decisions also pushed the yen lower against higher yielders.

Later today, the leading indicators index will be released at 5:00 am GMT. The index is expected to increase slightly to have a score of 86.4%, up from August’s reading of 83.2%. Take note however, that many of the indicators used for the index are based on have been previously released. That being said, trading may replicate yesterday’s action, with yen trading to be dictated by risk sentiment. With the yen posting some losses the last couple of days, we could see some profit taking if traders decide to close their positions as they close their books for the weekend.

The JPY was able to pocket some gains last Friday as the weak US employment report brought risk aversion back in the markets. Rallies among JPY crosses came to a screeching halt while the USDJPY sank below the 90.00 handle.

This week, Japan has a bunch of economic indicators on tap. Today it has current account balance, data on bank lending, and its M2 money stock report due. Bank lending was up by an annualized 1.6% in September and could post another increase for October. Japan’s current account surplus is expected to widen from 1.23 trillion JPY to 1.53 trillion JPY in September. Lastly, its M2 money stock could post another 3% year-on-year rise in October. These reports are due 11:50 am GMT.

On Tuesday, Japan will release its Economy Watchers Sentiment reading at 5:00 am GMT. The reading is expected to climb from 43.1 to 43.9 in October, indicating that people are becoming less pessimistic about Japan’s economic outlook. Also due on Tuesday is the preliminary machine tool orders report. The total value of new orders placed with manufacturers of machine tools fell by 62.1% year-on-year last September. Would it be able to rebound and post a smaller decline in October? Later on, data on Japan’s core machinery orders are due. A 3.7% increase is expected for September.

The corporate goods price index on the agenda for Wednesday. The report is expected to print a 6.0% annualized decline in the price of goods sold by corporations.

On Friday, the revised industrial production figure and Japan’s household confidence reading are due. No revisions are expected for September’s industrial production reading of 1.4%. Meanwhile, household confidence is expected to climb from 40.5 to 40.9 in October.

The JPY weakened across the board in yesterday’s price action when some of the G-20 nations - including Japan - voiced that the economies’ stimulus programs should still be maintained as of now. This led to massive selling in the USD and the JPY which consequently lifted most of the global equities markets.

Japan’s annualized bank lending and M2 money stock in October plus the nation’s current account balance in September were released yesterday. Japan’s bank lending grew again by 1.5% after gaining by 1.6% in the month prior. An increase in bank lending suggests a rise in consumption since most of the consumers’ spending are through credit. The M2 money stock also expanded by 3.3% on top of last month’s 3.0% increase. A jump in money supply is good in a sense since it leads to an increase spending as well. Meanwhile, Japan’s current account balance also rose to ¥1.34 trillion from ¥1.23 trillion. An expansion in CA means that the net capital inflow for Japan has increased from August to September. These positive numbers, however, did not have much short term impact on the valuation of the JPY.

The JPY ended negative in yesterday’s session due to the announcement that some members of the G-20 nations, including US Treasury Timothy Geithner, still do not want to lift their stimulus programs from their economies. The “safe haven” currencies like the USD and the JPY sold off following the report.

Today (5:00 am GMT), Japan will release the result of the Economy Watchers Sentiment survey. The index is seen to rise to 43.9 in October from 43.1 to, showing that people are beginning to be more optimistic about Japan’s economic condition. Later in the day, Japan’s machinery orders in September will also be issued at 11:50 am GMT. The month-over-month account is seen to grow by 3.4% following a 0.5% gain in the month prior. Japan’s economy is exports-based. Hence, an advance in this account will really mean great for the economy. An expansion here is likely given the growth seen in its trading partners in Asia, particularly China.

The lack of any fundamental catalyst kept the yen pairs trading in tight ranges yesterday. Japan’s economic calendar is once again empty of any important release today so expect the yen’s price action to be largely dependent on risk sentiment.

In any case, the results of the Economy Watchers Sentiment survey yesterday proved to be disappointing. It printed a reading of 40.9 for October, three points lower than expectation. Since the reading is lower than 50.0, it means that workers remain pessimistic about consumer spending in the country.

Japan’s Machinery orders in September sang a different tune though as it showed a 10.4% surge in orders. This is a huge leap considering it only rose 0.5% in August and economists were only expecting a 3.4% gain.

The US holiday combined with a lack of any significant data kept yen pairs under wrap yesterday. The USDJPY and EURJPY pairs ranged once again, closing near their opening prices.

We may see more ranging today, as no data will be released till Friday.  That is when the revised industrial production and household confidence index come out. Take note that these reports are normally low impact reports; nevertheless, it’s just something to keep in mind. For today, I’ll be on the lookout for the US unemployment claims coming out at 1:30 pm GMT, as well as Tim Geithner’s speech at 4:30 pm GMT.