Fundamental Outlook for Japanese Yen: Neutral

- Japanese yen rallies as Finance Minister says Ministry of Finance has no planes to intervene in forex market
- Yen bounces on better-than-expected GDP, but economy nonetheless contracts a whopping 4 percent in Q1
- Is the Japanese yen-funded carry trade recovering?

The Japanese yen scarcely survived a week of truly dismal economic data, squeezing out a marginal gain against the downtrodden US dollar but falling sharply against every other major counterpart. Japanese government officials reported the worst Gross Domestic Product contraction in the survey’s 50+ year record, and weak economic fundamentals limited trader demand for the low-yielding Yen. That being said, the currency actually saw a marginal bounce following the GDP news release; forecasters had anticipated an even worse economic contraction. A modestly positive week for the US S&P 500 and other global equity indices only compounded the risk-sensitive Japanese yen’s woes, and broader JPY momentum remains to the downside.

The USD/JPY finished below the psychologically significant 95.00 marker for the first time since March, and traders expected the Japanese Ministry of Finance to express concern at relative JPY strength. Yet Finance Minister Kaoru Yosano effectively ruled out forex intervention—removing a key source of USD/JPY support. It seems that the days of a highly vocal Ministry of Finance are long gone; current officials are taking a much more hands-off approach to the Japanese Yen exchange rate. We question whether such a laissez-faire stance is truly sustainable, however. Japanese exports have effectively crashed due to the combination of weak global consumption and a stronger Japanese yen.

Subsequent outlook for the recently-downtrodden Yen is somewhat unclear, but momentum plainly remains to the downside against all except the US dollar. An ostensibly busy week of economic event risk is unlikely to have a major effect on the Yen. We will instead monitor any and all developments in global risk sentiment—especially as seen through major global equity indices. The correlation between the USD/JPY and the US S&P 500 may have weakened through recent trade, but the equivalent S&P link to the EUR/JPY and GBP/JPY remains near record-highs. In other words, the EUR/JPY and GBP/JPY are likely to take their cues from developments in risky asset classes. The US dollar’s fate may depend on global investor sentiment towards USD-denominated asset classes.

David Rodriguez is a Currency Analyst at FXCM.