The Japanese yen is on a clear bullish momentum. The currency has outperformed major G-10 currencies since last month. In particular, the USDJPY has weakened from 114 in a month. The rally may now seem a bit over extended and we may see some rebound within the short-term. Anyway the pair is riding a downtrend channel and there are definitely some more room for further weakness.
Japanese bond yield keeps on declining. The 10-year bond is back is heading back towards 0. The current rate is the lowest since last October. This indicates that the demand for inflation-linked bonds are actually very low. Markets are then estimating than inflation should remain low over the next decade!
This is a clear pessimistic view and the deflationary environment. The strengthening yen should also weigh on consumer prices. Japan vicious circle is set to continue. And we remember that a month early the BoJ has downgraded its inflation forecast for fiscal years 17/18 and 18/19. The central bank inflation target seems a difficult objective and upside risks on the currency should very likely continue, especially against the greenback with Trump failing to deliver his reforms.
By Yann Quelenn