Lee Hardman, Currency Analyst at MUFG, notes that the yen has strengthened in the Asian trading session resulting in USD/JPY breaking below the recent low from the 17th March.
“USD/JPY has now almost fully retraced the adjustment higher following the BoJ’s decision to expand QQE at the end of 2014. The yen has been supported overnight by more risk-averse trading conditions which have coincided with renewed weakness in the price of crude oil.
Yen has remained resilient over the last month or so even as global equity markets have rebounded providing a bullish signal that it is likely to strengthen even further if investor risks sentiment begins to deteriorate again.
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The stronger yen is increasing pressure on the BoJ to ease monetary policy as soon as possible. The negative impact of the stronger yen was clearly evident in the latest Tankan survey which revealed business confidence deteriorated by more than expected in Q1. The release overnight of the latest composite PMI survey from Japan provided a similar negative signal falling to 49.9 in March which was the lowest level since the same time of last year. It has recorded its largest two month decline since the sales tax was last raised in Q2 2014.
More worryingly for the BoJ the Tankan survey revealed as well that inflation expectations continue to adjust lower signalling a loss of confidence in their ability to meet their inflation target. Inflation expectations amongst Japanese enterprises declined sharply in Q1. Average inflation expectations for three and five years ahead declined to 1.1% and 1.2% respectively in Q1.
In comparison, both measures of inflation expectations were recorded at 1.6% in the same period of last year. Governor Kuroda has reiterated overnight that the BoJ won’t hesitate to add stimulus if judged necessary and is prepared to utilise a combination of policies. However, he is faced with increasing scepticism that further easing is unlikely to effectively lift inflation expectations and re-weaken the yen.”