The Japanese yen is mostly lower today, and is selling off against all major currencies except the Australian dollar and the euro. Yesterday, the currency weakened alongside rising bond yields. Looking at USD/JPY, the pair managed to close higher despite overall weakness in the US dollar and a significant sell-off in the S&P 500 during US trading hours. While USD/JPY tends to track risk sentiment, the yen has become more sensitive to bond yields in recent times.
With limited news headlines and developments from Japan, the yen is mostly trading as a function of bond yields. As Japanese 10-year bond yields are fixed around 0% by the Bank of Japan, the difference between US and Japanese yields is just under 3% (as US 10-year bonds are currently yielding around 3%). While higher US yields have failed to weaken the yen in the past, interest rates have been driving currency markets since late March. As we have written before, this is because slowing global growth is reducing optimism for riskier investments. In the past, investors ignored rising US yields and chased investments such as technology and emerging market stocks. Today, rising US bond yields are hurting asset values as global growth decelerates. Our short-term outlook on the yen is bearish, while our medium-term outlook is neutral.
USD/JPY is currently trading above 109.20. EUR/JPY is currently up slightly and trading above 133.20.
Looking at Japanese economic data and events this week, the Bank of Japan’s upcoming meeting will be watched closely. The March Nikkei manufacturing PMI (53.3 vs. 52.6 expected) was ahead of expectations. The leading economic index for February (106 vs. 105.8 expected) was ahead of expectations. The All Industry Activity Index for February (0.4%) met expectations. Tomorrow, we’ll see foreign investment in Japanese equities and Japanese investment in foreign bonds. On Friday, the most important day, we’ll get the latest interest rate decision from the Bank of Japan, its outlook report and a press conference. We’ll also see the Tokyo consumer price index for April, the unemployment rate for March and March household spending. Finally, we’ll get March industrial production, and March retail sales, and March housing starts.