News out of Japan offered little hope to yen bulls at the start of the week as both labor and business data badly missed their marks, suggesting that the world’s second largest national economy continues to struggle. Japanese Capital spending surprised to the downside printing at -4.9% in contrast to a 13.6% gain the month prior. Although the decline may have been exaggerated by changes in MOF capex survey sample, it nevertheless indicates that Japan’s 2nd quarter GDP will be revised lower as the result of this decline.

In addition to the poor capex numbers, Japanese labor cash earning contracted for the eighth month in a row. In fact, today’s -1.9% drop was the worst performance of that gauge in more than three years, showing that Japanese consumer spending will likely remain moribund as wages refuse to rise. The news helped to push USD/JPY back above 116.00 and renewed interest in carry trades, with AUD/JPY and GBP/JPY gaining ground in European trade.

In contrast to Japan, UK economic news proved far more supportive as UK Manufacturing PMI surprised with strong 56.3 showing against consensus expectation of 55. UK manufacturers continue to see strong demand despite the hurdle of high exchange rates, suggesting that H2 growth in UK should remain firm. After seeing a wave of buying at the start of the London open that took the pair above the 2.0200 figure, GBP/USD fell back to 2.0160 on a round of profit taking.

Despite the good fundamentals, currency traders remain jittery about the stability of the credit markets. Over the weekend, Barclays’ chief executive Robert Diamond tried to reassure investors that “there is no back hole at Barclay’s” after speculation that the bank faces massive losses due to exposure to the asset-backed market. The combination of lingering concerns and the quiet of US Labor Day holiday is likely to keep risk appetite in check as we enter the North American session, and range trading should prevail for the rest of the day. However, should equity traders pick up on Tuesday where they left off on Friday, the carry trades will see further inflows, as for now at least, there is very little reason to be long yen.

Boris Schlossberg is a Senior Currency Strategist at FXCM.