Fundamental Forecast for Japanese Yen: Bearish

- Jobless rate fell to 4.9% from 5.1%
- Capital spending in the 4Q declined 17.3%, bettering expectations of -18.4%
- Yen plunges most since early December

After seeing steady gains throughout the week, the Yen was battered following a better than expected U.S. Non-farm payroll report. USD/JPY soared over 200 pips to erase of all of the week’s losses for the pair which had diverged from rising equity markets prior to the move. Troubles in Greece had generated support for the Asian currency as traders sold off risky assets in Europe as fears grew that a solution wouldn’t be reached to cure the country’s deficit issues. A new drastic plan of austerity helped give markets enough confidence for the troubled nation to put together a successful bond sale. The ability to address their deficit issue through issuing debt set the stage for the sharp yen reversal as markets waited for the labor report before taking any significant new positions. Yen crosses caught up with climbing stock markets to re-establish the strong correlation between them. An unexpected drop in the Japanese unemployment rate continued the theme of improving fundamentals for the island nation which could lead the BoJ to refrain from further monetary easing. A 17.3% drop in capital spending beat estimates of -18.4%, but demonstrates the challenges ahead for an economy that is relying sole on demand from abroad to promote growth. It is widely expected that the central bank will take measures to battle deflation as consumer price fell another 1.3% in February. Japanese finance minister Naoto Kan has requested the central bank’s help in fighting downward spiraling prices. In a recent news conference the finance head state that “I haven’t received any message directly from the BOJ,” regarding additional measures. As other developed nations mount their exit strategies Kan says “Given the economic conditions, we’re not in the situation where Japan can embark on an exit strategy,” “There are some bright indicators, however the economic situation, such as employment, signals we still need to rely on fiscal spending somewhat.”

Upcoming fundamental data may give us a clue on how aggressive policy makers may look to be when they convene during the following week to set future monetary policy. Speculation is that the BoJ is reluctant to take bold measures with interest rates already at 0.10% and an improving global economy. The Eco Watchers survey will provide evidence of the prospect of domestic growth with final GDP figures confirming the economy grew in the fourth quarter. Machine tool orders could be the most significant release as it has significant implication for future growth. Ultimately Japanese fundamentals will have little sway over price action as risk trends dominate direction. A continuation of prevailing risk appetite will continue to put pressure on the yen, upcoming U.S. advance retail sales may be the only upcoming event risk that has the potential to change sentiment. 

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