Japanese yen - JPY

The Japanese yen is the third-most traded currency in the world, according to a recent survey by the Bank for International Settlements. Specifically, the currency is involved in 11% of all foreign exchange trading. The yen is also unique as it is considered a safe haven asset - the currency strengthens during times of peril and weakens during strong economic booms. 

Outlook
Bearish

Daily update

The Japanese yen is mixed today. The yen is weakening against the euro and the Australian dollar, while strengthening against the US dollar and the British pound. Yesterday, the yen weakened and fell against the US dollar. Notably, USD/JPY is running into sellers above ¥111.0 despite steadying risk sentiment. Today's USD/JPY trading range is 110.10 - 113.20.

Taking a look at financial markets yesterday, risk sentiment improved following news that China's vice-commerce minister will lead a delegation to the US to revive trade talks between the two countries. The news boosted risk sentiment during the Asian trading session. Sentiment was further enhanced by solid US earnings reports, supporting US stock markets. Risk currencies finished the day higher, while the safe haven yen was lower. Risk assets have come under strong selling pressure in recent history. Yesterday's recovery in 'risk on' currencies will be a a welcome relief, but the outlook for global growth remains negative. Our outlook for the Japanese yen remains bearish.

USD/JPY is currently trading above 110.70. EUR/JPY is up slightly, and trading above 126.30. GBP/JPY is down slightly, and trading above 140.80.

Date Event Actual Previous
August 14 Capacity Utilization MoM JUN -2.2% -2.1%
August 14 Industrial Production YoY Final JUN -0.9% 4.2%
August 16 Balance of Trade JUL -¥231B ¥721B
August 16 Exports YoY JUL 3.9% 6.7%
August 16 Foreign Bond Investment 11/AUG ¥123.9B ¥1171B
August 16 Stock Investment by Foreigners 11/AUG ¥-107.1B -¥225.2B
August 16 Imports YoY JUL 14.6% 2.5%
Updated 

Japanese yen Outlook

Outlook
Bearish

Updated 

Background

Policy: The Bank of Japan's monetary policies remain fairly loose, and 'yield curve control' (holding 10-year Japanese government bond yields at 0% through buying and selling bonds) remains in place. In recent history, the BoJ stopped buying long-dated government bonds, which has been interpreted by markets as a hawkish shift in policy. In our view, the BoJ remains among the most dovish central banks, and a hawkish shift is unlikely in the near-term.  Looking at fiscal policy, the re-election of Abe is likely to result in additional fiscal stimulus over his term. Prior to the elections last October, he promised a substantial fiscal stimulus program focused on child care and education.   

Sentiment: Looking at the Commitments of Traders Report, speculators remain short the Japanese yen. Thanks to strong global growth, speculators believe that the yen is likely to remain weak as the economic environment remains "risk on". When sentiment approaches bearish extremes, the Japanese yen tends to rebound in response. If global bond yields fall in 2018 (as a result of weakening inflation), there is a risk that the yen begins strengthening.  

Economic data: The Japanese economy has registered surprisingly good rates of growth since the end of 2016. Annualized growth rates have increased from 1.6% in Q4 2016 to 2%+ thanks to a rebound in global growth as well as a fiscal stimulus program enacted in October 2016. Unfortunately, the country remains susceptible to deflation, with annualized inflation figures remaining substantially under the BoJ's 2% target since 2015. Thus the impact from growth and inflation is mixed.  

Analysis

In our last commentary on the Japanese yen, we wrote that the currency was looking excessively weak against the euro. In particular, we stated that bullish catalysts driving EUR/JPY were at risk as speculator positioning in both long euro and short yen trades were looking extreme. In addition, we flagged changes to the Bank of Japan’s “yield curve control” program as a potential risk for yen stre…

Published 
Tags: Japanese yen

In early 2017, doubts regarding the integrity of the Eurozone led many to take refuge in the Japanese yen. Unlike the euro, the Japanese yen exhibits classic safe haven characteristics and tends to strengthen during downturns. Following the Brexit referendum vote and US presidential elections, few were willing to bet on opinion polls that predicted Macron’s victory. Similar to political events in…

Published 

Japan has suffered from weak growth and inflation since the global financial crisis, and the Bank of Japan has frequently experimented with unorthodox monetary policies. In September 2016, the BoJ decided to directly target long-term interest rates. The so-called “yield curve control” (YCC) program fixed 10-year Japanese government bond (JGB) yields at 0%. If yields deviated from the BoJ’s target…

Published 
Tags: Japanese yen

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