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.
The Japanese yen is weakening against all currencies except the British pound today. The yen weakened yesterday after US Federal Reserve Chair Powell suggested that the case to raise US interest rates was "strong". His comments sent US Treasury bond yields higher, and also pushed up yields for many other developed country government bonds. Today's USD/JPY trading range remains 109.50 - 111.20.
The main short-term driver behind the yen remains rising US Treasury bond yields and overall strength in the US dollar. Thanks to accelerating US growth and inflation, the US currently has the best economic outlook of any major country in the world. A combination of relatively strong US growth and supportive risk sentiment is helping the yen weaken further.
Turning to other developments, Bank of Japan board member Funo said that Bank needs to focus on weak inflation. Funo said that the BoJ should continue its powerful monetary easing policies, while risks for weak inflation over the long-term were large. Governor Kuroda recently acknowledged weak inflation, and promised to deepen the debate regarding its causes at next month's meeting. Recent communications from the BoJ suggest that the Bank remains committed to its existing policies. Thanks to a slowdown across Europe and Asia, Japanese monetary policy is not expected to tighten at any point in the near future. Our outlook on the Japanese yen remains bearish.
|June 18||Adjusted Merchandise Trade Balance MAY||-¥300.0b||¥550.0b|
|June 20||BoJ Monetary Policy Meeting Minutes|
|June 20||BoJ Kuroda Speech|
|June 21||Foreign Bond Investment 16/JUN||¥1490.4b||-¥475.6b|
|June 21||Stock Investment by Foreigners 16/JUN||-¥40.8b||-¥108.3b|
|June 21||BoJ Funo Speech|
|June 22||Inflation Rate YoY MAY||0.6%|
|June 22||Core Inflation Rate YoY MAY||0.7%|
|June 22||Nikkei Manufacturing PMI Flash JUN||52.8|
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.
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