The yen has had a busy couple of weeks on the economic front, with a host of data coming out to help drive the currency.
But, after tomorrow, we get a few days rest where we can expect the currency to move chiefly on technicals. Then we will be getting the trade balance and the BOJ’s rate decision.
As we mentioned previously, Japan’s major economic hurdle is the lack of industrial production to help grow its GDP and support inflation.
While this doesn’t immediately affect the currency, its informative of the long-term trend for JPY pairs. Without growth in manufacturing, the BOJ is in a more difficult position to take action towards meeting its goals. And it puts increased pressure on the government to delay the sales tax hike. Both of these issues are very relevant to currency markets.
What We Are Looking For
A little bit before Japanese equity markets close and before Europeans arrive at their desks, we get Industrial Production figures for last month.
The consensus is that we’ll have a repeat of the figures from last time. We expect a +0.6% on a monthly basis, and -1.1% annualized.
The comparables are relevant this time. This is because May of last year was when businesses were preparing for the potential impact of pending tariffs by the US on China. This makes the annual comparables look a little worse than they ought to be.
If the data comes in line with expectations, we’ll have the end of three months of negative industrial production.If the trend were to continue in June, then that would bode well for Q2 GDP figures. It would also help support the Yen.
Yesterday we saw a continued increase in machinery orders, showing that there is a good chance that industrial production has increased.
Japan is being affected by the trade war more than other countries are. This is not just because their primary trading partner is China, but also because Japan is in the process of signing a trade agreement with the US as well.
The uncertainty around what concessions Japan might make – particularly in regards to one of its chief industries, automobiles – have kept industrial investment somewhat muted.
What It Means for the Future
Because a significant portion of Japan’s economic woes is external, traders are likely to be paying extra attention to the trade balance figures next week. Japan has been suffering a trade deficit since the middle of last year. And this is an unusual situation for the country.
While the situation might be less than ideal from the point of view of the Japanese government and the BOJ, the country still ranks relatively high in terms of growth among major developed economies. Among safe havens, it’s still doing better than Switzerland.
The Bigger Picture
In the end, the things that are keeping the Japanese economy from reaching its full potential are the things that make its currency more attractive. With other major central banks rumored to be considering rate cuts, the BOJ is not really in a position to ease given its current position. That would also keep the yen stronger going forward.