While most of the world is taking an extended weekend, Japan is still hard at work on Friday. And we have the release of some key data as well.
With Europe and the Americas closed for the holiday, most major traders are also away from their desks. So, we could see some exaggerated reactions to data on Friday due to lower liquidity and the market being driven by less experienced traders.
Here are some things to keep in mind about the JPY ahead of market close.
What’s Coming Up
Friday is the end of a busy data week for the Yen. At 01:30 CET (or the day before at 19:30 EST) we get last month’s series of inflation data. The BOJ’s policy decisions will closely follow. Therefore, we could see some movement in the markets.
Markets focus on Core CPI, because that’s what the BOJ does. Expectations are for this to come in at 0.6% annual, which would be a drop from the 0.7% registered last month. This would be a continuation of the downward trend, much to the chagrin of regulators.
As the inflation rate moves away from the target rate, it increases the chance of the BOJ taking action to support economic growth. And this is broadly seen as negative for the yen. If the result beats estimates, then it would be seen as bullish for the yen. With the series of negative economic news, we’ve been having lately, the potential for a relief rally could push yen pairs down quite a bit.
We expect the other two inflation indicators, CPI and CPI excluding food and energy, to repeat their prior month’s results. Projections are for CPI to remain at an annualized rate of 0.2% and excluding food and energy, to stay at 0.4%. Both of these are far from official targets.
How This Fits in the Economic Puzzle
The BOJ has a host of circumstances working against them in their effort to increase inflation in the country. Most of these circumstances relate to the exchange rate.
There are two major competing forces that result in the CPI being caught in the crossfire. On the one hand, we have the deterioration of the world’s economic outlook. And the IMF’s recently reflected this in its cut to projections. On the other hand, there’s the move towards safe havens. And Japan is the primary target for flight to safety flows.
Without a resolution to the trade dispute between the US and China, which also has Japan caught in the middle, these pressures will remain. We can see symptoms of that in the series of data releases this week.
Industrial production came in at half the expected growth rate, just limping ahead by 0.7%. As for the adjusted trade balance, it slipped into deficit as Japanese exports drop.
The other factor is the differential in bond rates. As central banks in commodity currency countries take on a more negative outlook, yield rates are becoming less attractive for carry trades. This is leading to repatriation of capital to Japan. This further supports the value of the yen, making it even harder for exporters to compete in price on the world market.
In the long term, this would likely cause the yen to remain relatively strong. This is despite the lack of internal economic growth, pushing down JPY pairs even if the BOJ tries to increase inflation. After the longest easing cycle in history, and with the government’s debt above twice the GDP, there seems to be little regulators can do to curb yen strength. And this could embolden the bulls.
Even if the data were to come in with increased inflation, it still doesn’t change the long term math for the yen.
Traders, therefore, need to be on the lookout for signs that the circumstances have changed and weakness in the yen is back on the cards.