Jason Najm
Foster Donnel
Analysis of the Japanese Yen (JPY)
The Japanese Yen (JPY, ¥) followed by the US Dollar and the Euro is the third most traded
currency in the world. Japan has the third largest national economy ranked on a basis of gross domestic
product (GDP). Due to an inadequacy of natural resources, Japan’s economy is largely dependent on
exports, which have experienced a 6.9% annual gain in September. Two key markets for Japanese
exporters are Europe and China, which have been experiencing economic woes. Greater than half of
Japanese exports are to Asian countries, which rose 8.1% from the previous year at the end of Q3.
Japanese sales to China gained an annualized 8.8%, which sparks worries as growth is slumping to its
lowest point since the global financial crisis.
The Japanese economy is still struggling to adjust to a 3% sales tax increase in April to 8% from
3%. The tax increase caused detrimental effects to the economy as Japan’s GDP decreased an annualized
7.2% in Q2. This is the greatest contraction since the 2009 global financial crisis. Due to bleak economic
outlooks and threats of recession in the EU, exports to Europe only grew 0.7% on-year in September,
which is slowed substantially from 5.6% in August.
Recent news has caused the Yen to plummet past 114.00 versus the US Dollar. A major factor in
this is the monetary policy statement on October 30th from the Central Bank of Japan. Although the usual
effect is hawkish and good for the currency, the market would prove otherwise. BOJ governor, Haruhiko
Kuroda, announced Thursday that the central bank will continue and expand the quantitative and
qualitative monetary easing (QQE). The bank is aiming to achieve the price stability target of 2%, as long
as it deems necessary, which is not promising for Japan’s inflationary outlook. They intend to do so by
increasing the monetary base at an annual pace of 80 trillion JPY. The increase in monetary base will be
done via the purchase of Japanese government bonds (JGB), which also had their maturity extended to
roughly 7-10 years. Furthermore, following the Friday BOJ press conference, Kuroda addressed
inflationary issues. The April increase in sales-tax and the international fall in oil prices have been
increasingly putting a downward pressure on Japan’s prices. The BOJ utilizes the core consumer price
index (CCPI) as the primary gauge, in measuring inflation. A 3% gain was mentioned, but after adjusting
for April’s tax hike, the gain was only 1%. The conference also revealed a reduction in the estimate for
the CCPI to 1.7% from the previous 1.9%, while maintaining a forecast of 2.1% for the coming year.
Etsuro Honda, economic adviser to Japanese Prime Minister Shinzo Abe suggests that the next tax hike
should be deferred until April 2017 due to the current weak state of the economy.
In the coming week, BOJ Governor is expected to speak Tuesday (11/4 at 20:30 GMT) at
Kisaragi-kai meeting in Tokyo. The speech is anticipated to increase volatility in the currency and be
more hawkish than anticipated. Also, there are several notable events affecting the US Dollar that should
be observed prior to trading the USD/JPY pair. On Thursday (11/6 at 7:30 GMT) the US Department of
Labor will release the unemployment claims, which provide details on the amount of individuals who
have filed for unemployment insurance. It’s anticipated for the number who have filed unemployment to
be less than the forecast, showing increasing economic health. It’s important to note that this release is a
lagged indicator of the prior week’s activity. The unemployment rate will then be released 24 hours
following the unemployment claims, which are anticipated to have a hawkish effect on the currency.
Lastly, US Federal Reserve Chair Janet Yellen is planned to participate in a panel in Paris, France on
Friday (11/7 at 9:15 GMT) regarding the status of the policy since the onset of the financial crisis. It’s
important to observe any mention of interest rate forecasting or future policy as any mention of rate
increases may cause the Yen to move passed its resistance point of 114.178 versus the US Dollar. Her
Jason Najm
Foster Donnel
involvement is anticipated to be hawkish and good for the currency. It might be useful or relevant to
mention that the Nikkei hit highs not seen since 2007 this past week, and with the Bank of Japan expected
to continue or possibly increase economic stimulus, it’s a fair guess that the Nikkei will continue it’s hot
climb.
Technical analysis shows there is a strong upward trend for the USD/JPY, but there is also room
for caution. On the 4-hour and 12-hour charts, RSI levels are sitting right around 82+, signifying that
traders have been on a tear buying this pair. Likewise, RSI levels for the daily and weekly charts are
hovering around 75, also signaling that this pair is heavily over-bought. Look for continued strengthening
for the USD, but be mindful of traders looking to take a breather and lock in some profits. MACD
momentum indicators on 4-hour and 12-hour charts looked to have peaked at current levels. However,
momentum continues to strengthen on an even longer-term timeline on daily and weekly charts.
Traders looking for the next massive resistance, look no further than the 10-year level of 122.00.
However, based on technical and fundamental analysis, momentum is looking to cool down after a huge
buying frenzy. Long-term outlook, we anticipate a significant pullback before USD/JPY ever teases the
122.00 levels. Shorter term, look for continued strength for the USD/JPY, but don’t expect momentum as
hot as we’ve seen the past few weeks and be cautious of higher than average volatility with a loaded week
of economic and fundamental news.
OPINION:
Long-Term: FLAT/HOLD
Short-Term: BUY/HOLD