The USDJPY broke above the 156 handle, scoring another milestone in its two-month rise. More than the level, what was notable was the practical silence from Japanese authorities. There is a lot going to keep them busy, but the continued assent of the pair without comment raises eyebrows. Given Japan’s weak economic performance, some traders might speculate that intervention has been put off and the currency pair could keep rising.
On the other hand, the bulk of the gains could be attributed to strength in the dollar instead of weakness in the yen. That’s particularly the case since November 6, when US yields spiked. Asian markets have been particularly weak over the last couple of days in light of the latest appointments to a prospective Trump cabinet. They are seen as increasingly hawkish on trade, which keeps supporting the dollar.
Distraction or Strategy?
This week, the Japanese Diet (parliament) managed to confirm Shingeru Ishiba as Prime Minister, but in a minority government. Almost immediately the problems from the main party in Japan losing its parliamentary majority became apparent. Lawmakers have not been able to come to an agreement on a new budget.
Ishiba is noted to be a hawk, wanting to get the country’s finances in order. Japan is, of course, noted for having a massive debt, relying on chronically low interest rates. Those low rates are what make the currency attractive as a carry trade source, generating the latest weakness. On the other hand, increased deficit spending would be expected to increase inflation, which is also a chronic problem.
No Breaks on the Yen Train?
The USDJPY fiscal debate puts in limbo some of the expectations around what the BOJ could do. A large spending package would likely support the case for more tightening. That might, somewhat counterintuitively, support the yen in the current juncture. But, lawmakers are looking to call special sessions to debate the budget, as sign of significant disagreements that have yet to be resolved.
The BOJ has an additional problem: Raising rates is restrictive, and the economy is already near stagnation. Without additional stimulus from the government or GDP growing, the BOJ could be confined to not raising rates. And this might let the carry trade take over again, making another run at the 160 handle.
What to Look Out For
The latest minutes from the BOJ showed that there were divided views on whether or not to push the rate up higher, and convey a hawkish tone to the markets. Economists are also similarly divided, with only a slim majority saying that a rate hike this year is now out of the question. Given the level of uncertainty, the data comes into renewed focus and could move the markets. The focus is likey on next week’s CPI figures, but Friday’s GDP numbers could provide important clues.
Japan’s Q3 GDP growth rate is expected to fall to 0.3% from 0.8% prior. While still in the green, a much slower growing economy would give the BOJ less “headroom” to raise. A miss on the data here could open up new heights for the USDJPY. But a beat could swing expectations back for a rate hike in December, and slow the rise of the currency pair.
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