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Japan Trade Balance and Inflation: Enough to Change BOJ

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The USDJPY is once again flirting with the 150 level, after bouncing off of it earlier this month. There were wide-spread rumors that the Japanese government had intervened on October 4, and the pair backed off.

But the persistent dollar strength and the refusal of anyone at the BOJ to hint at potentially ending the ultra easing policy just keeps the pair floating back up. There are many analysts who believe that even if the Japanese were to go full-bore in intervening in the exchange rate, it wouldn’t be enough to stop the slide. The underlying fundamentals show too big of a gap between the yen and the dollar, that it would require coordination with US officials to manage to revert things.

Facing the Inevitable

The real solution to the weakness in the yen would be for the BOJ to move towards tightening. It has already made two extremely cautious steps in that direction by widening the band of its YCC. However, as the BOJ itself insists, the action keeps everything still in ultra-easing mode. Fluctuations can be wider, but the BOJ hasn’t shifted its stance.

But even the most dovish of doves at the Japanese central bank acknowledge that at some point rates will have to increase. In fact, the bank has a plan in place to move in that direction; just not as fast as the market is demanding. The current status is that there is an on-going study to determine the impact of a policy change, which is widely expected to conclude that it’s time to raise rates. The report will be concluded in March, and it seems that the BOJ is trying to hold on to the current policy until then. In the meantime, the question for traders is:

Can the Data Force the BOJ’s Hand

The weaker yen has been something of a boon for the Japanese economy, as the cheaper exports are seen supporting the economy. The country has been long-stagnant, and saw improvements in both GDP and real wages since the precipitous fall in the yen. But it has also raised costs for imports, which raises a problem for the island nation that must import a substantial amount of its goods and raw materials. Potentially unexpected fallout from the extreme fall in the currency could end up making the BOJ speed up its rate hiking process.

Where exactly the tipping point is remains an open question. But investors are likely to be keenly looking at the coming data for signs that the economic situation in Japan is sending the kind of warning signs that might get the BOJ’s attention.

What the data says

First up is Japan’s trade balance, which is expected to see the deficit nearly half to -¥500B, compared to -¥930B in the prior month. The difference is expected to be driven by a dramatic change in imports, from growing at 17.8% to falling -11.0%, while exports see only a modest increase of 2.9%, relatively speaking. The lack of imports could be a sign that the Japanese economy is stuttering in the face of higher costs.

Next up on Friday is the inflation rate, which is expected to drop a little to 3.1% from 3.2%, above the BOJ’s target of 2%. But, that would be the 18th consecutive month for a beat, and isn’t seen as necessarily enough to trigger the BOJ to be worried. Japan’s so-called “core-core” rate, which is more or less equivalent to other countries’ “core” rate, is expected at 4.1% but also down 4.3%. While the initial assessment that slower inflation is a sign of less need to hike; it can also be a sign of lack of dynamism in the economy that might warrant an adjustment in monetary policy as well.

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