Fundamental Forecast for Japanese Yen: Neutral

- BoJ Intervenes for Second Time?
- All Industry Activity Index Rises 1.0% as Expected
- Technicals Point Toward Continued Yen Strength

Reported BoJ intervention during Friday’s Asian session generated a brief bout of across the board yen weakness, but the move was quickly retraced as cautious markets were favoring safety. The Asian currency would ultimately lose ground against several counterparts, as a positive U.S. durable goods orders report generated broad based risk appetite. A disappointing U.S. new home sales report would add to the prevailing outlook for additional QE from the Fed, the potential for additional stimulus only added to support for equity markets, and succeeding where the central bank failed. However, the dollar continued to be punished by the prospect of FOMC purchases, causing it to remain flat on the day against the yen.

The yen’s strength against the dollar has raised concerns amongst policy makers with Governor Masaaki Shirakawa stating in an interview that the central bank needs to monitor risks to Japan’s economy, exports, and corporate profitability. Board member Ryuzo Miyao also expressed concerns in a speech stating that “We’re entering a situation where we need to pay more attention to downside risks.” He would also acknowledge that the buying of Japanese Government bonds is one policy action that the central bank will consider at their next meeting. It could be an interesting meeting considering the recent activity of the central bank, especially since today’s yen weakness has also been attributed to the possible resignation of Governor Masaaki Shirakawa. The monetary authority head is scheduled to speak on September 25 and 27, which could present event risk for the yen if he sheds light on his status, intervention or QE.

Continued risk appetite could be the best case scenario for policy makers as it will lead to flows out of the safe haven currency as traders look for higher yields. However, the potential for growth concerns to re-emerge is high considering central banks are beginning to lean toward additional stimulus. The fundamental calendar is full of key gauges that will provide insight into the economy, despite their lack of market moving potential. The prospect of action from the central bank may give additional weight especially the CPI report. Signs that deflationary pressure are growing could force the central bank’s hand, especially if the Tankan readings point toward slower activity. Early forecasts are for consumer prices to remain unchanged at -0.9% with manufacturers becoming more optimistic. A lower jobless rate, higher retail trade, plus improvements in industrial production and housing starts are expected. If a rosier growth picture emerges, then the monetary authority could stay on the sidelines, leaving the yen at the mercy of broader trends.

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