Fundamental Forecast for Japanese Yen: Bullish

- Japanese industrial production rose 1.1% in July, annual rate still deeply negative
- Retail trade fell 2.5% in July from a year ago, marking the smallest drop since January
- Japanese capital spending rebounds in the second quarter

Political news didn’t have much of an impact on the Japanese yen during the past week, despite the shift in power from the Liberal Democratic Party (LDP) to the opposition Democratic Party of Japan (DPJ), though realistically, it was well known beforehand and fully priced in. Instead, risk trends remain the dominant driver of price action for the low-yielding currency, and while the Japanese yen ended the week mostly higher against the majors, it faltered against the Australian dollar and British pound as carry trades rocketed higher on Friday. That said, the Japanese yen crosses remain in fairly well-defined trading ranges, marking a summer-time consolidation of the rallies seen throughout Q1 and Q2. These ranges have not moved quietly, though, as volumes have generally been fairly low, leading to extremely choppy price action. This makes the next week of trading interesting, because after the US market holiday on Monday (Labor Day), volumes may finally start to pick up a bit and yield larger, directional moves in the Japanese yen crosses. According to DailyFX Quantitative Strategist David Rodriguez, the odds may be in favor of JPY bulls, as the “September Effect” has historically weighed on the S&P 500.

As far as Japanese economic news goes, there shouldn’t be any groundbreaking releases on hand. On Monday, the Japanese trade surplus is projected to narrow slightly, which could be the result of waning export demand. On Tuesday, the Eco Watchers survey is anticipated to reflect persistently weak outlooks amongst consumers and businesses alike. On Wednesday, domestic CGPI is projected to show a mild increase in input prices on a monthly basis, but with the annual rate projected to remain near the record low of -8.5 percent, the data may not help to alleviate deflation concerns. On Thursday, the final reading of Q2 GDP is forecasted to confirm that the economy grew by 0.9 percent from the previous quarter and 3.7 percent from a year ago, all of which was led by exports. However, if there are any revisions, Japanese equities may respond strongly and trigger risk-driven moves in the FX market.

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