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Jane Foley, Senior FX Strategist at Rabobank, explains that the USD/JPY reached its highest levels since January this week after it had a brief boost to risk appetite, but since then the JPY has reclaimed some ground.  

Key Quotes

“In Q1 Japanese GDP shrunk 0.6% q/q saar. This was the first contraction in more than two year.”

“In April exports grew 7.8% y/y, a little below the market consensus. In volume terms the expansion was a robust 4.6% y/y.   Assuming world growth remains strong, Japanese external demand can be expected to be boosted by demand for products such as manufacturing equipment and motor vehicles.   This, however, has drawn Japan to the attention of US President Trump.   According to the US Census Bureau, in 2017 US trade in goods with Japan culminated in a deficit of USD68.8 bln.”

“News that The Trump Administration is looking into the use of national security law to apply tariffs on imported vehicles has not only reinvigorating concerns about the impact of full blown trade war on global growth, but it has specific implications for countries such as Japan with strong auto industries.”

“The impact of a rise in trade tensions could be particularly significant for Japan’s economy given the important of external demand. That said, the safe haven function of the JPY suggests that it is likely to strengthen rather than weaken in an environment of worsening risk appetite.   Fears that the planned summit between the US and N.Korea may not take place are also weighing on sentiment.”

“Added to international concerns, the JPY may find some additional support from the scandal that has been engulfing the Ministry of Finance.   This week the MoF reportedly admitted that it disposed of documents to cover up talks between officials and a school operator with links to PM Abe’s wife.   The school was given a generous discount on the purchase of state land.”

“We are broadly positive on the outlook for the USD, though we see scope for medium-term gains in USD/JPY as limited given the rise in risk aversion. We are forecasting a move to USD/JPY 112 on a 9-12 month view.   In the short-term support is offered by the Ichimoku base line at 109.29.”