Since the beginning of the year, the Japanese Yen has been strengthening notably after the period of weakness at the end of last year.
Last year USDJPY strength came on the back of the US Dollar rally as the Fed’s kicked off its policy tightening. However, this has been a negative factor for Japan. The Bank of Japan has been trying to keep the pressure on the Yen for a long time to fight deflation; it seems like the BoJ policy is not that effective.
At the beginning of the year the Yen was trading around 118.0, while on Friday, the pair closed the week around 111.0.
Inflation, growth and many economic activities are slowing down, not only in Japan but globally, which in return should keep the BoJ from thinking to exit the current policy easing anytime soon.
Declining Inflation
After suffering from Deflation in 2016, Japan’s inflation picked up in the end of 2016. In November of last year, Japan inflation posted the biggest monthly increase in more than two years.
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However, it has been slowing down since then. The latest outcomes show only an increase of 0.2%, which is the weakest reading since October of last year. At the same time, JPY has been rising during the same period. Is this only due to the Japanese Yen? Maybe.
Unstable Growth
Despite the fact that Japan managed to post a positive GDP readings for the past five quarters, and the annual GDP has been rising for the past eight quarters, the economic activities have been unstable due to the continuous measures by the BoJ.
Negative rates are helping growth in some sectors but not in the overall economy, especially knowing that the Debt to GDP ratio is now over 250% and the government budget deficit is over 4.5%.
However, the Jobless Rate has been declining to a new record, below 3%, which is one of the lowest jobless rates in the world.
Is this enough for the BoJ to think about Exit policy? Not really, as wages are still weak and not even trending. What matters to the BoJ now are inflation and wages.
Since inflation is slowing down and wages are not picking up, this is not the right time to think about any tightening policy anytime soon.
Where Is The Yen Heading?
As we all know, the Japanese Yen is considered as one of the safe haven assets, which is not that satisfying for the BoJ.
Looking at the long term monthly chart, USDJPY managed to retrace right from its 50% Fibo (Monthly) (2011 lows to 2015 highs). At the same time, the pair also retraced by more than 70% of the downside move that occurred from 2015 highs to 2016 lows, before declining all the way back to 107.90’s last month.
The technical indicators are still pointing lower, suggesting a possible trend continuation to the downside. This will go on as long as the pair continues to trade below the previous highs of 2017 around 118.80’s.
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Despite the fact that the pair is now trading above its long-term moving averages, traders should be aware that the US Dollar uptrend is over, which keeps the pressure on the downside in USDJPY. Meaning, the general trend for USDJPY remains bearish despite the recent spikes. At the same time, where is the next target? By using Fibonacci expansion 101.0 would be the first level to watch followed by 91.50. When? Maybe this year.
On the shorter-term view, the pair is still trading below its daily trend line resistance, despite the fakeout that occurred a week ago, the downside trend resumed with high volume, leading the pair to decline back below the trend.
These moves keep giving us more signs that the downside pressure is likely to continue over the coming days/weeks and months.
When Will BoJ Intervene?
Traders should always be aware that the Bank of Japan intervention might come in any moment. Higher Yen is not desired by the BoJ anytime soon, especially with deflation fears back on the table, and knowing that USDJPY could tumble below this year’s low.
