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A Reform That Puts Japan's Recovery in Peril

A Reform That Puts Japan's Recovery in Peril

Boris Schlossberg, Technical Strategist

Renewed selling in Japan’s Nikkei index and concerns regarding a new Japanese sales tax have weighed heavily on the USDJPY, which has lost significant ground since failing at the all-important 100 level.

It has been a very slow session on the first trading day of the week with high-beta currencies carving out very narrow ranges amidst a very quiet economic calendar. Only USDJPY has been making meaningful moves, as the pair came under further selling pressure in the wake of a 3% slide in the Nikkei.

The USDJPY sunk to a low of 97.62 as liquidation in the Nikkei triggered some risk-aversion flows during Asian and early-European trade today. The pair continues to trade heavy after failing at the 100.00 level while investors remain cautious about the Fed's tapering plans as well as concerns about Japan's efforts at fiscal reform.

Japanese Prime Minister Shinzo Abe is now rethinking the timetable for the implementation of a new sales tax due to take effect this fall. Although Finance Minister Taro Aso tried to reassure investors that plans to introduce the sales tax will proceed on schedule, Abe has expressed some reservations regarding the tax. He is concerned that a fresh levy on consumers could stifle the country's nascent recovery before widespread easing measures truly have a chance to take hold.

Indeed, the state of the Japanese consumer remains perilous, and demand came into question again today after retail trade data disappointed, printing at 1.6% versus 1.7% expected. Abe, therefore, has to walk a fine line between assuring investors that proper fiscal reforms will take place to mitigate the country's massive debt, which stands at a startling five trillion dollars, and at the same time, he must pursue an aggressive expansionist policy in order to continue stimulating the economy. This conflict has caused a retrenchment among USDJPY longs, and the pair remains under pressure for the time being.

US Housing Data Continues to Improve

In today’s North American session, the economic calendar is quiet, with only US pending home sales on the docket. Trading continues to be dominated by technical factors instead of fundamentals, and EURUSD continues to find resistance just ahead of the 1.33 barrier.

Following this morning’s strong US housing data, that 1.33 resistance barrier in EURUSD is now more likely to hold.

By Boris Schlossberg of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.