Fundamental Outlook for Japanese Yen: Neutral

- The Bank of Japan upgraded their economic outlook for the first time since 2006
- Japan’s trade deficit shrank in April to 52.2 billion yen from -97.1 billion yen
- Japan’s all-industry index fell yet again in March by 2.4%, following a 2.3 percent drop in February

Unlike the week prior, there weren’t many major economic releases for Japan, and we ultimately saw the Japanese yen fall 0.6 percent against the US dollar, more than 2 percent against the British pound and Swiss franc, roughly 3 percent against the Australian dollar and Canadian dollar, and a whopping 3.9 percent against the New Zealand dollar. The moves were in line with a 3.6 percent drop in the S&P 500, suggesting that risk trends are still dominating Japanese yen price action, for the most part.

That said, there was a bit of optimism stoked about the Japanese economy after the Bank of Japan’s Monthly Report was released, as they upgraded their outlook for the first time since 2006. The report said that “economic conditions have been deteriorating, but exports and production are beginning to level out.” It is clear, though, that the BOJ sees foreign demand as being the only chance for recovery in Japan, as “private demand is likely to continue weakening with corporate profits and firms' funding conditions remaining severe and a worsening employment and income situation.”

This point may be highlighted over the next week, as labor cash earnings are forecasted to contract for the eleventh straight month and by the most in almost seven year during April as the index may post at -4.2 percent. Furthermore, capital spending is projected to have plummeted 27.1 percent in Q1, suggesting that businesses do not expect growth to resume any time soon and adding to evidence that job losses could continue to climb.

That said, traders should keep an eye on major equity indexes like the S&P 500, as a rally above its May 8 high of 930 would suggest that risk appetite may be high enough to lead FX carry trades higher. On the other hand, reversals in risk assets could set the stage for a sharp pullback in the Japanese yen crosses.

Jamie Saettele is a Technical Currency Analyst for FXCM.