Fundamental Bias for Japanese Yen: Bullish

- Annual Corporate Goods Prices Fall by Most on Record
- Current Account Surplus Swells as Imports Tumble 43.9%
- Merchant Sentiment Rises to Highest in Nearly 3 Years

The Japanese Yen looks poised to advance in the week ahead as risky assets reverse lower, prompting liquidation of carry trades funded in the perennially low-yielding currency. Earnings season is upon us, and stocks look increasingly shaky having ended June trading at the highest level relative to earnings since 2004, a year when the world economy grew 4.1% in real terms. The OECD, IMF, World Bank, and all major central banks are in agreement that the world economy will shrink this year, suggesting the markets have been more than a little overzealous and need only a little nudge from some disappointing second-quarter profit figures to topple over. Stand-by yield-seeking trades like GBPJPY and all of the Japanese unit’s pairings with commodity-linked currencies are on average over 91% correlated with the MSCI World Stock Index, meaning that any return to risk aversion is likely prompt sharp carry-trade liquidation and boost the Yen.

Turning to the economic calendar, the modest helping of scheduled releases is unlikely to provoke much of a reaction from the market considering traders have probably priced in the underlying themes behind the likely data outcomes long ago. Consumer confidence will likely tick up for the sixth consecutive month in June, mirroring recent improvements in the Eco Watchers and Tankan Survey measures of merchant and business sentiment as the government’s record-breaking 25 trillion yen fiscal package continues to work its way into the broad economy. The same is likely to be the case with May’s Tertiary Index of service demand: the metric rebounded from a record low in April as government handouts helped support consumers’ purchases of services and more of the same seems plausible. Clearly, the important question going forward is whether such improvements are sustainable after the flow of stimulus cash dries up. The Bank of Japan seems pessimistic on this front, noting that consumption is likely to remain weak as the “employment and income situation becomes increasingly severe.” Indeed, the jobless rate rose to the highest in over 5 years in May as the economy shed 440k jobs. Still, near-term stabilization is welcome if only in delaying the need for further stimulative action, bringing Japan closer to an eventual recovery in overseas demand that will ultimately feed a rebound in the world’s second-largest economy. This means the upcoming monetary policy announcement is likely to be a non-event once more, with Maasaki Shirakawa and company saving any ammunition they may still have until they really need to use it.

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