While the USDJPY rally remains lukewarm, some very unconventional indicators suggest that Japanese consumers are spending, which would help promote recovery and lessen the need for added QE measures.
Currency markets are essentially treading water as the economic calendar remains barren and many of the key players continue their holidays.
The only movement in today's Asian session came from USDJPY and the commodity dollars. USDJPY initially shot up to a high of 97.85 as the Nikkei rallied on the open, but the pair then sold off sharply on the correction in stocks, only to stabilize around the 97.65 level. USDJPY continues to trade in tandem with the Nikkei as it is back to being driven by risk flows.
See related: 5 Roadblocks for the USD/JPY Rally
Japanese policymakers are still debating the merits of a sales tax in September while the nation’s economic data remains mixed. Today, Japan reported its third-largest trade deficit on record as exports rose slightly less than forecast, printing at +12.2% versus 12.8% expected, while imports shot up 19.6% versus an expected gain of only 16.0%. This was Japan’s 13th consecutive trade deficit, highlighting just how much the country’s vaunted export-oriented economy has suffered.
On the other hand, in one of the more unusual economic measurements, Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset Management, noted that Japanese are eating the least amount of bean sprouts since 2009. Bean sprouts, which are viewed as a very cheap source of nutrition in Japan, see sales rise when consumers begin to budget. Takumori also notes that an increase in horse-racing tickets and a decline in suicides are signs of improved consumer sentiment, which should help the Japanese economy recover.
Still, with USDJPY stubbornly below the 100.00 mark, Japanese officials obviously feel frustrated with the lack of depreciation in the Japanese yen (JPY). A strong yen will not only dampen any hopes of a strong recovery in exports, but will also make it much more difficult to break the country's decades-long deflationary cycle. Therefore, it’s quite possible that Bank of Japan (BoJ) officials may decide to increase quantitative easing (QE) measures in the foreseeable future if they see no progress on the exchange-rate front.
With no data on the North American calendar, the glacial pace of trade may continue in today’s US session with currencies taking their cues from the equity market. For now, the US dollar (USD) continues to suffer from doubts regarding Fed tapering, and the markets may not get any additional clarity on that issue until the release of the latest Federal Open Market Committee (FOMC) meeting minutes this Wednesday.
By Boris Schlossberg of BK Asset Management
