The value of the yen continues to mostly be a factor of risk: when European headlines are bad, the yen gains across the board and is the No. 1 safe haven currency.
However, Japan is far from being “safe”.
- Debt: The huge debt mountain is still there and there’s always a danger that it could erupt one day. This day currently seems far, but the threat exists.
- Stalling exports: Japan saw a drop in manufacturing production during June, for the first time in 2012. This is a result of stalling exports.
- Energy: One of the factors that weighed against the yen was the change in energy policy. Around one year after the horrific earthquake, tsunami and nuclear disaster at Fukishima, Japan closed down all the nuclear reactors. This was a big change in flows, as Japan found itself importing coal and oil for energy. This hurt the seemingly eternal trade balance surplus. And now, Japan is gradually beginning to re-open them, despite protests. If this process gains traction, we could see a stronger yen.
- Stimulus fades away: A lot of money was put into the economy after the disaster, and this helped the economy. However, the economy finds it hard to stand on its own, and after an OK first half, the second half of 2012 doesn’t look too good.
- Sales tax and potential political crisis: The Japanese government is pushing a hike in the sales tax. The hike is due only in 2014 and could encourage consumer spending before the hike comes into effect. However, the heated political debate could force the government to resign
- Reaction to US Indicators: In the shorter term, USD/JPY reacts in the most “logical” way to US indicators: the pair rises on positive indicators and falls on bad ones. This isn’t always the behavior seen in other pairs. Another Fed decision that doesn’t include QE3 could boost the pair.
All in all, the pair continues having long term potential to rise, but this may be slow, and more trouble in Europe can keep it low.
This article is part of the Forex Monthly Outlook. You can download it by joining the newsletter in the form below, which appears on any article on Forex Crunch.Get the 5 most predictable currency pairs