The Japanese yen continues to strengthen as markets doubt the outlook for future inflation. This morning, concerns are growing after two Republican Senators have opposed aspects of the tax bill. As described in our US dollar daily update, uncertainties regarding future taxes is keeping a lid on US dollar strength. Expect USD strength and yen weakness assuming the tax bill ultimately passes. Looking at Japanese economic data, Tankan survey results point to continued strength in the underlying economy. Sectors including large manufacturing and large services businesses were the strongest. The economic outlook for small businesses is not as benign. Despite recent strength, our medium-term outlook remains bearish.
USD/JPY is currently trading just above 112.0. Looking at the euro versus the yen, EUR/JPY is down and is currently trading above 132.0.
This is a fairly light week for economic data releases relating to the yen. The corporate goods price index beat expectations (3.5% vs. 3.3% expected). The tertiary industry index was higher than the previous print (0.3% vs. -0.2% prior). Machinery orders were much stronger relative to expectations (2.3% vs. -2.8% expected). Cross-border stock (-¥84.8b) and bond investments (-¥487.6b) show that capital outflows continue. Nikkei manufacturing PMIs (54.2) and industrial production (0.5%) show continued strength in the underlying economy. Tankan surveys showed that large Japanese businesses remain optimistic. Last week, GDP growth beat expectations.
As the yen weakens as inflation expectations rise, we are downgrading the yen to bearish in the short-term. Note that the currency is trading within normal conditions, based on technical indicators on the daily chart.
As the yen sells off on hopes for US tax cuts, we are downgrading the yen to bearish. Looking at the yen on a weekly chart, the currency is trading within normal conditions. This is based on various technical indicators when looking at a weekly chart.