Dollar/yen moved lower but didn’t go very far. At these levels, Japanese officials are very nervous.
Japan replaced its finance minister, and the new chief is intensifying the rhetoric heard from his predecessor.
- The prospect of elections might be behind the stronger tone that now includes also threats about the independence of the central bank. The BOJ already significantly increased its QE program, but this hasn’t stopped the yen’s strength.
- Threats also come from outside: Tensions between China and Japan over the disputed islands already halted production at several Japanese factories in mainland China. The ongoing issue might hurt Japanese exports and further weigh on Japan’s vulnerable trade balance.
- Trade balance deficit worsens: The devastating March 11th 2011 tragedy in Japan had a horrible human cost and also flipped the country’s trade balance: Japan traditionally enjoyed surpluses, which contributed to the yen’s strength. The closure of nuclear facilities made the country import a lot of oil. The recent deficit of 0.47 trillion yen was worse than expected.
- Low growth: After a strong first quarter, Japan’s growth fell back to 0.2% according to the final number. A drop back to recession is likely in Q3.
- Deflation: The fight against deflation is not fruitful. Japan suffered from a third consecutive drop in prices. Dropping prices might be good in the short run, but afterwards they curb consumer spending, which hurts prices, curbs spending, etc.
The Federal Reserve’s decision on QE3 definitely hurt USD/JPY, but the upwards pressure on the yen might become too much. It is not supported by Japanese fundamentals and is definitely not supported by the authorities, which could intervene during the month of October.
In 2011, an intervention was seen at the end of October – this had a short lived effect, and could have been seen as an attempt to help Japanese exporters when they converted money at the end of the month.
Will this happen again now?
This article is part of the October monthly forex outlook. You can download the full report, including the currency technical outlooks and the relative strength index by joining the newsletter in the form below.
Further reading: USD/JPY Forecast.
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