Fundamental Forecast for the Japanese Yen: Neutral

- Fed Chairman Bernanke Stirs Up Risk Aversion
- USD/JPY: Remain Long, Targeting Advance to 88.80
- USDJPY – Japanese Yen Outlook Positive Amidst Sentiment Shift

The Japanese Yen weakened against most of its major counterparts following a rise in risk appetite paired with speculation for a currency intervention, and the USD/JPY may continue to retrace the decline from earlier this month as policy makers in the world’s second largest economy see scope to ease policy further in the second-half of 2010. The Bank of Japan minutes showed the board agreed to maintain an extremely accommodative policy in an effort to stem the downside risks for the economy and expects its new JPY 3T lending program to help restore price stability, while a few members expressed an increased willingness to loosen monetary policy further in an effort to encourage a sustainable recovery.

At the same time, BoJ Deputy Governor Hirohide Yamaguchi said the options to “strengthen the foundations for economic growth are not necessarily limited to the measure the bank has introduced” following the policy meeting minutes for July, and pledged to “make sufficient considerations while exploring various possibilities” as the central bank aims to balance the risks for the region. Moreover, Mr. Yamaguchi held a dovish outlook for inflation and expects core inflation to ease as the output gap narrows, and went onto say that the emerging economies must avoid overheating as the region benefits from the rise in global trade. However, the central bank policy maker noted that the level of recovery in Japan is not sufficient to result in long-term growth as the marked appreciation in the exchange rate reduces the competitiveness of Japanese goods, and argued that the board will need more time to assess the impact on the domestic economy after declining to comment on whether the BoJ will intervene in the currency market to temper the recent rise in the Yen.

As a result, increased speculation for a currency intervention could push the USD/JPY back towards the monthly highs around 89.00 as the daily RSI bounces back from a low of 27. Nevertheless, the economic docket for the following week is expected to show a widening trade surplus, while retail spending is forecasted to increase for the fifth time during the last six-months, and the data is likely to encourage an improved outlook for future growth as the recovery gathers pace. However, negative price growth could weigh on the exchange rate as the region continues to face a risk for deflation, and the central bank may look to ease monetary policy further over the coming months in order to mitigate the downside risks for the region.

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