Fundamental Outlook for Japanese Yen: Bearish

- Swiss National Bank’s intervention spurs speculation of Bank of Japan intervention in JPY
- Japan posts first current account deficit in 13 years as exports fall 46.3% from a year ago
- Japanese machine orders plunge a record 39.5% in January from a year ago

The Japanese yen ended the past week off on a mixed note, as the currency gained versus the US dollar, British pound, and Swiss franc but fell against the Canadian dollar, euro, Australian dollar, and New Zealand dollar. While much of this had to do with a resurgence in risk appetite, as evidenced by the 9 percent rise in the Dow Jones Industrial Average from the March 6 close through the March 13 close, we also have to consider renewed prospects of currency intervention. This was brought back to the forefront by the Swiss National Bank, who said on March 12 that they would work to prevent any further appreciation of the Swiss franc against the euro.

The situation in Switzerland is very similar to that of Japan, as exporters have been hurt by the gains in their national currencies against the currencies of their biggest trading partners. For Japan, this refers specifically to China and the US, which are the top two importers of Japanese goods (according to the CIA World Factbook), as the Japanese yen has gained over 9 percent against both the Chinese yuan and US dollar over the past 6 months. Japanese officials have cited concerns about the yen’s appreciation in the past, but they have yet to move toward hard-lined verbal intervention, let alone physical intervention. With the G-20 meeting over the weekend, there is potential for discussion of currencies to occur, and if this is actually written into the final communiqué, the yen could pull back sharply.

However, that is not the only piece of event risk looming on the horizon for the Japanese yen. The Bank of Japan is expected to announce late on March 17 that they have left their target rate unchanged at 0.10 percent, but the release of the Bank’s monthly report at 01:00 ET on March 18 should provide more information on their view of economic conditions. Over the past few months, the BOJ’s report has reflected consistently worse economic assessments, and this may continue to be the case as the higher value of the Japanese yen takes a toll on the country’s export industry. Given the mounting speculation over the potential for Japanese currency intervention, there is also a risk that we could see such an announcement with this central bank meeting, which would likely drive the Japanese yen lower. However, if the markets ultimately find that neither the G-20 nor the BOJ even mention currencies, the Japanese yen could see a bit of a boost by the end of the next week.

Antonio Sousa is a Currency Analyst for FXCM.