Fundamental Forecast for Japanese Yen: Neutral

- Eco watcher’s survey rose to 49.9-the highest in nearly three years
- Current account surplus widens to 2534.2 billion yen-the largest in two years
- Leading index rose to 102.8 from 98.4 as expected-highest in nearly four years

The Japanese yen after a week of volatility ended slightly lower against the dollar but marked gains against the Euro and Pound as the European debt crisis saw the safe haven currency benefit from increasing pessimism. A monumental 750 million euro bailout package by European leaders to help Greece and the other indebted members had sparked a bout of risk appetite and sent all risky assets soaring to start the week. Indeed, the commodity dollars all held onto gains against the Asian currency with the Canadian dollar leading the way. However, if we see the broad based risk aversion that ended the past week continue to plaque markets then additional yen strength should be expected.

The fundamental picture has started to brighten for the world’s second largest economy with improving exports pushing the current account surplus to a two year high of 2534.2 billion yen. Additionally, the measurement of leading indicators which looks at account inventory ratios, machinery orders and stock prices pointed toward continued improvement as it rose to 102.8 from 98.4-the highest since August, 2006. The domestic picture has also improved according to the Eco watcher’s survey which rose to 49.9-the highest in nearly three year. The improvement in the gauge that measures sentiment of retail workers, taxi drivers and other business cycle sensitive workers is a sign that export demand is translating into broader growth. However, domestic demand remains weak and that has the BoJ looking for ways to stave off deflation which includes a new loan program aimed at encouraging private banks to lend more to industries with growth potential.

The central bank will convene this week to determine future monetary policy and with declining consumer prices still a problem, expect policy makers to leave their target rate at 0.10%. In addition to the monetary policy meeting the economic calendar is full with meaningful but unlikely market moving releases. The second reading of first quarter GDP is expected to be revised higher to 1.4% from 0.9% as the economy continues to distance itself from the recession. However, the tertiary index is forecasted to have declined by 1.5% as the service sector continues to be inflicted by weak demand. Nevertheless, the yen’s fortunes will continued to be tied to risk sentiment and considering the prevailing concerns additional strength could be expected. Yet, risky assets regained their footing in the final hours of trading and improving global fundamentals could generate risk appetite and yen weakness.

DailyFX provides forex news on the economic reports and political events that influence the forex market.