USDJPY spent the summer recoupling with interest rates. The JPY weakness helped the Nikkei rise nearly 2000 point in September. Yet, recent risk-sell which strengthened JPY, has eliminated most of the early gains. Outside of market volatility, there are real sign that the effect of “Abenomics” are fading and real economy is slowing. Since the BoJ Tankan surveys released in September there has been clear decelerations in key areas. Current business conditions index for large manufacturers has fallen by 2 points while industrial production remained weak. Perhaps the lone bright spot for Japan and the global economy is exports orders embed in manufacturing PMI, which increased 1.2 to 50.9. While just marginally above expansion territory Nikkei bulls will take it. Inflations remains weak limiting the impact of the current uptick. The BoJ’s prefer measure of core-core inflations indicted that prices in Tokyo increased by 0.7% in September. The result of higher prices across the board was likely the effect of higher energy prices rather than growth driven.
Markets have been speculating that Japanese policy makers might changes the economic policy mix. Specifically ending the current accommodating monetary policy stance and by default trigger the start of normalization. However, the negative direction of growth and positive movement of inflation suggest that nothing meaningfully will be adjusted. Prime Minster Shinzo Able landslide victory on 20th September suggests that Abenomics will be maintained for the remaindered of this tenure. Overall, despite marginal momentum in inflation trend the BoJ remains a distance from its 2% inflation target. Market should not expected and material changes form yields curves control policy with newly adopted forward guidance. With policy a core reason for JPY weakness the renewed support for Abenomics should create momentum for further JPY weakness (recoupling with historically dominate US-JP interest rate spread). That said geopolitical uncertainty, and fears of US protectionism and higher interest rates could easily trigger renewed safe haven seeking and stronger JPY. USDJPY was able to stage a recovery bounce off 50 d MA at 111.85 potentially target 113.39 range resistance.
By Peter Rosenstreich