Fundamental Outlook for Japanese Yen: Bearish

- Japan’s trade deficit widened to 320.7 billion yen in December as exports plunged 35% from a year ago
- The Bank of Japan left rates unchanged at 0.10%, as expected
- Japanese officials express concern over appreciation of yen, but fall short of verbal intervention

As usual, the Japanese yen traded in line with shifts in risk appetite over the course of the past week, with widespread losses in the stock markets helping to boost the currency. These correlations are likely to hold in the near-term, while fundamentals shouldn’t play much of a role. Nevertheless, there will be a handful of Japanese indicators released that may be worth watching.

On Monday, the minutes from the Bank of Japan’s December meeting, when the Monetary Policy Board unexpectedly cut rates by 20 basis points to 0.10 percent, will be released. In light of this policy action, commentary within the minutes is likely to be very bearish on prospects for the Japanese economy, global growth, and financial market conditions. On Wednesday, retail trade numbers may reflect a sharp 0.8 percent drop in consumption in December, indicating the fourth straight month of contraction and signaling waning domestic demand. Adding to evidence of this on Thursday, the jobless rate is anticipated to rise to 4.1 while household spending is forecasted to remain negative for the tenth straight month. Finally, industrial output is projected to have dropped 0.9 percent in December, leading the annual rate to hit a new record low of -20.0 percent.

From a technical perspective, the formation of a descending triangle on the intraday charts of the Dow Jones Industrial Average doesn’t bode well for other risky assets, including the Japanese yen crosses, as a decline below the weekly low of 7,909.51 would signal a bearish break lower. There will be a large number of US companies reporting earnings over the course of the week, including Wells Fargo, Boeing and Ford, which has the potential to spark volatility in the US stock markets. However, if for some reason investor sentiment improves a bit, equities and the Japanese yen crosses could gain, but overall this week is likely to be one of consolidation for risky assets.

Jamie Saettele is a Technical Currency Analyst for FXCM.