Fundamental Analysis: Yen’s Losses ahead of the BoJ’s Meeting

Fundamental Analysis: Yen’s Losses ahead of the BoJ’s Meeting

The yen has made fairly noteworthy losses against most major currencies today in the runup to the Bank of Japan’s decision on rates tomorrow morning. Pressure on the yen has come mainly from gains for shares and significantly weaker data. However, rumors that the Japanese government might downgrade its economic assessment for March are worthy of comment.

USDJPY moved up to week highs around ¥111.70 in the late morning today. EURJPY also reached a fortnight high over ¥126.40. Meanwhile the pound briefly touched ¥148.75, sterling’s highest level against the yen since November last year. On the other hand, the Aussie dollar has struggled to make much headway, instead holding around ¥78.70.

Data supports weaker economic outlook, and shares gaining

The Nikkei Business Daily reported from Tokyo late last night that the Japanese government is considering seriously a downgrade in its assessment of the country’s economy for March. Among the factors behind this are weaker growth and demand in China. Although nothing is confirmed yet, this report spurred some selling of the yen in many of its pairs.

Recent data does back up the rumor, though. This week’s releases apart from PPI have been very negative. Manufacturing data this week from Monday to Wednesday was all negative for the yen. Releases of machinery orders and balance sheets missed both the previous releases and forecasts.

One of the most important figures this week was the much lower foreign investment in Japanese shares. Stock investment by foreigners as released just before midnight came in at negative ¥1158.6 billion. This is over three times worse than February’s figure. Foreign investment in bonds is also only just over half the previous figure at ¥245.7 billion.

Shares themselves have also created some headwinds for the yen since yesterday. The S&P 500 - generally the most volatile and risk-averse American index - has been up sharply since Monday’s session. The Dow also posted a decent gain of around half a percent yesterday despite the fallout from Boeing (BA.US)’s decline.

All eyes on the bank of Japan tonight

The Bank of Japan is meeting overnight GMT, with its rate decision due at 03.00 GMT tomorrow morning. Any change in rates is extremely unlikely, so traders’ focus is on comments from governor Haruhiko Kuroda and of course the monetary policy statement itself.

Although Japan’s core inflation rate has been rising on the whole since the start of 2017, the BoJ’s target of an annual figure around 2% remains distant. Dr Kuroda has consistently advocated for loose monetary policy, so positivity based on recent Japanese inflation is hard to imagine tomorrow morning.

On the other hand, a significantly more dovish outlook from the BoJ is also fairly unlikely. Despite risks to international trade and so weaker industrial data, Japan’s economy has recovered surprisingly well from 2018’s chaotic summer of natural disasters.

In general, tomorrow morning’s meeting will probably not yield any significant surprise for traders. However, most will watch the meeting with interest in attempt to gauge likely sentiment better based on the bank's response to recent data.

Yen moving down some more

Overall the fundamental picture suggests that more small losses are likely for the yen against most other currencies into the end of the week. That said, traders should watch tomorrow morning’s meeting carefully for confirmation of the existing outlook.

Buy and sell the yen against a wide range of currencies, established and emerging.

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