Over the last month, the USDJPY pair has gained substantial ground, and has been threatening to break through the 150 handle for more than a week. Part of that is due to a stronger dollar as markets see fewer rate cuts from the Fed. The bulk of the gains can be seen in the aftermath of the US NFP that changed the outlook on the world’s largest economy.
But, the yen also remains relatively weak. Japan is one of the destinations for investors pulling money out of China, and a recovery in the Asian giant would imply a reversal of those flows. So, weakness in the yen in the aftermath of China’s stimulus announcement is also an important thread to follow. Meanwhile, the internal situation creates uncertainty for monetary policy and fiscal policy.
The Volatility Doesn’t End
High inflation, as reflected in the Japan CPI, was seen as one of the factors contributing to the political shift in September, with the arrival of a new Prime Minister. General elections are scheduled for later this month, with the ruling LDP party potentially losing its majority for the first time in more than a decade. Though that doesn’t mean a change in the Premiership; rather Shingeru Ishiba would have to form a coalition government. That increases some of the uncertainty around his otherwise hawkish stance on fiscal and monetary policy.
The increases in the cost of living haven’t come along with significant growth in the economy, however. That would otherwise give the BOJ more room to take on a hawkish stance to see off inflation. The latest sign that the central bank in Japan is getting boxed in was the unexpected drop in exports in September. Slowing growth in both the US and China in particular, plus a stronger yen, has pushed down the value of Japanese exports, hurting growth in the economy.
The Cautious Approach
Exports are expected to struggle in the coming months, and with an economy reliant on selling overseas, a too strong currency can be an obstacle. Meanwhile, major unions are reportedly planning demands for another 5% or more increase in salaries when the wage negotiation season restarts next year. That leaves the yen in a particularly difficult position for a central bank to break out of: Stagflation.
BOJ speakers of late have emphasized that while rates do need to rise, they should do so extremely slowly. This highly hesitant approach could mean that there isn’t much monetary policy reaction to the data. As a result, markets could test the limits of policymakers, particularly if a strong US economy compared to a weak Japan reignites hopes that the carry trade can stay around for a little longer.
What the Data Points To
Friday sees the release of the latest inflation figures for Japan, with the headline CPI figure expected to show a slowing of the annual rate to 2.7% from 3.0%. While an improvement, it’s still well above the BOJ’s target. The core rate (which doesn’t include energy) is expected to remain unchanged at 2.8%, implying that the slowing in price increases isn’t due so much to monetary policy as it is to the drop in global crude prices.
Markets are still pricing in what might be called a “half” of a rate hike by the BOJ by December. But, even with that expectation of rising rates, the USDJPY has been creeping higher. It might be that traders are looking for a breakout of the 150 level to see if authorities will take stronger measures to shore up the yen.
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