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According to Jane Foley, senior FX strategist at Rabobank, Japan’s external sector has been hit hard on the back of the slowdown in Chinese growth this year and this pressure has impacted the country’s manufacturing sector and this has been very evident in economic data this year.

Key Quotes

“The Reuters November Tankan Report suggested that manufacturers were the most pessimistic for 6 ½ years.”

“Unsurprisingly there are concerns as to how the services sector will hold up particularly in light of the recent hike in the sales tax which has impacted the confidence of the services sector. However, there is reason to suspect that domestic demand is holding up well and this appears to be allowing BoJ policy to maintain a policy pause – at least for now.”

“The resilience of Japanese domestic demand can be linked to an increase in public expenditure and to continued investment by non-manufacturing firms. The BoJ’s Tankan Report highlighted that business sentiment in this sector held relatively high levels.”

“In the approach to this year’s consumption tax hike, concerns were heightened by the fact that the previous hike in 2014 had helped tip the economy into recession. It is Kuroda’s view that the impact of the latest hike will be smaller “mainly because the net burden on households is small and various measures to smooth out demand have been implemented”.”

“Overall, Kuroda expects the Japanese economy to remain on an expanding trend though FY 2021 with the impact of the slowdown in global growth to be limited.”

“For now, it appears that the BoJ is positioning itself for steady policy into the end of the year, but the risk of another move early in the New Year is still wide open. Despite this prospect of further easing, we expect the JPY to strengthen moderately next year largely on the back of our expectation of another round of US/China tensions which would likely increase safe haven demand. On a 6 month view we expect USD/JPY to be trading around 105.00.”