Fundamental Forecast for Japanese Yen: Bullish

- Japanese Trade Surplus Widens on Exports but Outlook Vulnerable
- Speculative Sentiment Points to Clouded Japanese Yen Outlook

The Japanese Yen is likely to continue tracking stock performance, looking past scheduled event risk despite a busy economic calendar in the week ahead. This puts the onus on another set of earnings releases as well as the continued evolution of the Greek debt fiasco.The Yen remains acutely sensitive to risk appetite, with the short-term percent-change correlation between the Japanese unit’s average value and the VIX Index – a measure of stock volatility and investors’ go-to “fear” gauge – now reading at a hefty 0.92. Further, the inverse percent-chance correlation between the Yen and the MSCI World Stock Index has advanced to -0.60, the highest in a month. This hints the currency is likely to continue tracking the ups and downs on global equity exchanges.

On balance, the outlook seems to favor risk aversion, and thereby promises gains for the Japanese currency. So far, the first-quarter round of earnings announcements has looked robust on profits but conspicuously less so on sales and revenues. This bodes ill for risk sentiment, hinting that firms will find it hard to sustain generate growth as cost-cutting reaches its natural limit while governments and central banks increasingly pull back stimulus.

Meanwhile, the situation in Greece is heading toward a finale after the government in Athens announced early Friday that it will seek to activate the 45 billion euro EU/IMF aid package promised earlier this month. Markets will watch closely to size up the conditions that policymakers will demand of the southern European nation, but generally speaking, the implications of a bailout seem negative in and of themselves. Indeed, the action sets a precedent for what markets will expect in the event of a sovereign flare-up in larger EU member states like Spain or even Italy (11% and 17% of EZ GDP respectively, as compared to just 2.6% for Greece). This means large debt accumulation in rich EU members (especially Germany), compounding the region’s already-precarious fiscal position and threatening to weigh down economic growth as debt issuance boosts borrowing costs, crowding out private demand.

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