Fundamental Forecast for the Japanese Yen: Bullish

The Japanese yen gained over 2 percent against the dollar over the past week as declining U.S. yields sunk the greenback. The Asian currency fared well versus the other majors despite prevailing risk appetite. However, weakness at the end of the week could signal a shift in momentum as rising commodity prices continues to stoke demand for yields. Meanwhile, a brief rise in U.S. yields to end the year failed to generate support for the buck signaling more downside risks for USD/JPY.

A slew of fundamental data crossed the wires but failed to generate any volatility as the yen continues to see direction dictated by broader trends. Improvements in industrial production and manufacturing reflect a sustaining recovery as emerging market demand continues drive growth. A slower pace of inflation in November to 0.1% from 0.2% could put policy makers on alert as they try to keep deflation at bay. The BoJ minutes revealed that the central bank has agreed to examine their asset purchase plan as needed. Their QE response has underwhelmed markets which opened the door for current strength. A more aggressive effort could curb bullish sentiment, especially if they take another stab at intervention. However, committee members expressed concerns over the effect of asset purchases on their finances signaling that they will most likely sit on the sidelines over the short-term.

The Japanese economic docket is considerably lighter this week with only vehicle sales the only release that will garner a second look. The main event risk for the yen will come from the FOMC minutes and U.S. Non-farm payrolls. Signs of sustainable job growth and a brighter outlook from U.S. policy makers could fuel risk appetite potentially sinking the Asian currency. Conversely, a struggling labor market and hints at further QE could see Japanese traders look to repatriate funds driving the yen higher.

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