Japan Still Faces Deflationary Conditions

The Japanese Yen continued to weaken on evidence that deflation remains a problem. Although retail sales increased in the month of August, the drop in consumer prices, rise in unemployment and deterioration in industrial production will prevent the central bank from raising interest rates anytime soon.

Next week we have the Tankan due for release. This quarterly report is usually one of the most market moving indicators for Japan. However the Dow seems to be the bigger focus for Yen traders at the moment and we do not expect that relationship to change anytime soon.

Written by Kathy Lien, Chief Currency Strategist of DailyFX.com