Fundamental Outlook for Japanese Yen: Bullish

- Meeting Minutes Reveal BOJ Uncertain About Japanese Economic Outlook
- Merchant Sentiment Falls to Lowest in 7 Years in September
- Bank of Japan Retains Rates at 0.50% Citing “Sluggish” Growth
- Equipment Orders Plummet in August as On Shrinking Foreign Demand

Next week’s economic calendar points in a familiar direction as the world’s second largest economy grapples with full-blown recession. The Domestic Corporate Goods Price Index is expected to see wholesale inflation shrink -0.6% in September, bringing the annualized rate to 6.6%. This will see the pace of price growth down 9.6% since it topped out in July and began to slide along with the rapid depreciation in crude oil. The Current Account surplus is seen narrowing to 1198.3 billion yen in August as the trade side of the equation sinks into deficit. Augusts’ Merchandise Trade Balance fell deeply into deficit courtesy of a sharp decline in exports to the US, with shipments down -21.8%. Overall exports grew just 0.3% versus 8.0% in the preceding month. The capital side is unlikely to be supportive: a 0.9% rise in the 10-year bond probably not enough to offer meaningful counterweight as Japanese stocks slid -1.5% while the Yen lost -1.6% in August. The service sector is set to shrink -0.8% through August, throwing the Tertiary Industry Index back into negative territory after a surprise bounce to 1.2% in July. The final revision of the Industrial Production reading is also due, with preliminary estimates pointing to a -6.9% contraction in the year to August, the worst result in nearly 5 years.

On balance, the fundamental outlook has long since faded from view as the Japanese Yen exchange rate has become a direct reflection of traders’ risk sentiment amid the continuing global credit crisis. Wall Street issued a tumultuous session to end a week of historic losses with the Dow Jones benchmark index down 700 points at one time and up 300 points at another to close at an effective stalemate showing -1.5% in the red. The yen mirrored the stock market’s volatility, with USDJPY trading as low as 97.89 to close the week at 100.23. Significant event risk lies ahead as next week’s trading open will see forex markets price in the communiqué from Friday’s G7 summit in Washington, DC. The markets may breathe a sigh of relief should the meeting produce a meaningful, coordinated response to the crisis, weighing on the yen as risk appetite mounts a comeback. Realistically, political differences make the chances of such an accord unlikely at best, so the Yen should continue to gain strength on risk aversion in the near term until the global nature of the crisis forces individual countries into pursing similar sets of policies to offer more liquidity, insure deposits, facilitate mergers and otherwise bolster the banking sector.

Jamie Saettele is a Technical Currency Analyst for FXCM.