Japanese Yen To Face Slower Growth, Speculation For BoJ Intervention

Japanese Yen To Face Slower Growth, Speculation For BoJ Intervention

Fundamental Forecast for the Japanese Yen:Neutral

• Japanese Current Account Surplus Unexpectedly Narrows as Exports Slow
• Bank of Japan Holds Monetary Policy Unchanged as Expected
• Japanese Yen Reverses Course after Finance Minister Plays Coy in Intervention Preparations

The Japanese Yen fell back from a 15-year high as the U.S. dollar rallied against its major counterparts, and the low-yielding currency may continue to lose ground over the following week as investors see scope for the Bank of Japan to intervene in the foreign exchange market. However, as risk trends continue to dictate price action for the major cross rates, a shift in market sentiment could drive the Yen higher as it remains the most sought after funding-currency.

The BoJ held the benchmark interest rate at 0.10% in Augst and maintained its economic assessment for the third month as the region continues to benefit from the rise in global trade, but policy makers showed increased concerns regarding the marked appreciation in the exchange rate as it weighs on the competitiveness of Japanese exports. The central bank said that the risks for the economy were “broadly balanced,” but noted that developments in the foreign exchange market should be “examined closely” as the outlook for global growth remains clouded with uncertainties. Accordingly, BoJ Governor Masaaki Shirakawa pledged to “carefully monitor” the rampant fluctuations in the financial markets as the strength in the Japanese Yen poses a risk to the recovery, and the central bank head is scheduled to meet with Prime Minister Naoto Kan next week according to a report in a Japanese newspaper, which could spur increased speculation for a currency intervention as policy makers aim to stem the downside risks for the economy. Moreover, Japan Finance Minister Yoshihiko Noda argued that the “excessive and disorderly currency moves are harmful for the stability of the economy,” and went onto say that the recent moves have been “a little bit one-sided” as the recent appreciation in the exchange rate fails to reflect the underlying strength of the recovery.

As speculation for a BoJ intervention intensify, with market participants continuing to put the central bank to test, the USD/JPY may make another run at 85.00 as the central bank refrains from stemming the appreciation in the exchange rate. Nevertheless, the economic docket is expected to show the economy expand at a slower pace in the second quarter as market participants forecast GDP to increase 0.6% following the 1.2% rise during the first-three months of the year, while the annualized rate is projected to increase 2.3% after expanding 5.0% in the first-quarter. As policy makers anticipate to see the recovery moderate going forward, the BoJ may see scope to ease monetary policy further over the coming months, and the central bank may continue to take unprecedented steps to stem the downside risks for growth and inflation in the second-half of the year as the economic outlook remains clouded with uncertainties. - DS