Yen Continues to Drop After BOJ Stationary - How Low Will it Go?

[B]- Japanese Yen: GDP slightly weaker and BOJ on hold

  • Euro: Leibscher upside risks persist
  • Canadian Dollar: CPI on tap
  • US Dollar: Weekly jobless, LEI, Philly all ahead[/B]


Yen Continues to Drop After BOJ Stationary - How Low Will it Go?
Another night of trade in FX, another drop in the Japanese yen. The lowest yielder in the G-3 universe was hurt tonight by less than stellar GDP results and persistent inaction on the part the BOJ. Japanese GDP printed at 0.6% vs. 0.7% expected and although this was the ninth straight quarterly increase it provided no reason for the BoJ to expedite its “low and slow” approach to monetary policy and as such disappointed speculators betting that a more robust number would compel the central bank to hike rates soon.
The BOJ then confirmed market?s expectations by stating in its headline assessment that “Japan?s economy is expanding moderately” with Governor Fukui, once again saying that “The Central Bank will adjust rates gradually”. It is precisely this “moderation” in growth that finds BOJ officials caught between a rock and a hard place. Despite strong export growth and corporate profits, wages in Japan remain stagnant leaving consumer demand moribund. Without the consumer, Japanese expansion remains decidedly lopsided towards capital investment and quite vulnerable to any contraction in global demand especially in US, its second largest export market. Already, signs of slowdown in CAPEX are evident in the latest Machine Orders data which printed -4.5% vs. projections of 1.5% gain.
In short, with Japanese consumer boxed in by tepid wage growth and rising energy costs (which have destroyed any appetite for new automobile purchases) and Japanese corporate sector facing a possible slowdown in one of its principal export markets, the prospect for a pick up in Japanese GDP growth appears minimal at best. Without the foundation of strong growth, the BOJ will not aggressively hike rates, as monetary officials continue to fear a relapse into deflation that plagued the economy for more than a decade.
With currency players sensing no change in monetary policy for the foreseeable future, the carry traders returned to the pair with vengeance and pushed USDJPY above the 121.00 figure by mid-morning London session. The question ahead, however, is will yen weakness persist or will the unit finally rebound? While current economic fundamentals provide yen bulls with little hope, the carry trade could come in for very quick liquidation if equity prices around the world begin to correct. Politics is yet another risk that the market may be under pricing. With yen at record lows against the euro and near yearly lows against the buck, Japan?s key trading partners in Europe and US are likely to strenuously object to the persistent devaluation of the currency which provides Japanese exporters with a considerable advantage over its EZ and US competitors. While, China has taken the brunt of criticism from US lawmakers so far, the weakness in the yen is beginning to aggravate US legislators especially in manufacturing centered Mid West. Should rhetoric escalate at the upcoming G-7 meeting, the one way carry trade may become vulnerable to a quick unwind. But until and unless such scenario unfolds, the yen remains the weakest link amongst the majors given the current economic landscape.