The Japanese yen is mostly higher today. The yen is currently strengthening against all major currencies except the Australian dollar and the Canadian dollar. Yesterday, the currency sold off sharply thanks to rising global bond yields. USD/JPY soared above 110, an area of significant resistance, and closed above the critical level. Today, the pair is trading slightly above 110, and has given back much of yesterday's gains.
Turning to recent developments, year-over-year Japanese GDP growth was significantly below consensus estimates. The contraction was led by falling investment, consumption and export growth. Many commentators expect growth to pick up over the coming quarters, fueled by business investment and consumer spending. Exports are the most worrisome area of the economy. Thanks to falling mobile phone parts and factory equipment exports (mostly to China), the export sector is likely to weigh on Japanese GDP growth in the future. Weakness in Chinese demand is another sign that emerging markets are weakening this year.
While the data had a limited impact on the yen immediately after its release, the yen is now strengthening. As a currency with safe haven characteristics, the yen tends to strengthen following bad news. In a recent commentary, we debated the question of whether the yen trades as an inflation proxy or a safe haven. Thanks to positive risk sentiment today, the answer is that yen continues to be highly sensitive to relative bond yields. In the near future, we expect a continued deterioration in growth to result in yen strength. Our short-term and medium-term outlook on the yen is bearish.
USD/JPY is currently trading above 110.10. EUR/JPY is currently down slightly and trading above 130.50.
In this week’s Japanese yen economic calendar, we’ll see growth and inflation data. The YoY domestic corporate goods price index for April (2%) met expectations. YoY Q1 GDP growth (-0.6% vs. 0% expected) and capacity utilization for March (0.5% vs. 1% expected) were both lower than expected. March industrial production (2.4% vs. 0.5% expected) was higher than expectations. Tomorrow, we’ll see weekly foreign bond investments and foreign investments in Japanese equities. We’ll also see machinery orders for March. On Friday, we’ll see the national consumer price index for April (as well as ex-food and energy CPI). Last week, Japanese wage growth accelerated above expectations.