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The USD/JPY Trap That Japan Hates

The USD/JPY Trap That Japan Hates

Boris Schlossberg, Technical Strategist

Mixed data from Japan and uncertainty regarding the proposed sales tax are dogging the nation’s recovery, and USDJPY remains stuck below 98.50, much to the disappointment of Japanese policymakers.

Major currency pairs remained within very tight ranges during the Asian and early-European sessions on the last trading day of the month. On the geopolitical front, UK Parliament voted not to engage militarily in Syria, and although the US reaffirmed its commitment to a response, the market appears to be losing interest in the Syria story since any military action is now likely to be delayed.

In Japan, the deluge of economic data provided little clarity, as the results were decidedly mixed. Japan's unemployment rate declined to 3.8% from 3.9% the month prior as labor conditions continued to improve, and Tokyo CPI remained at 0.4%, which could be a sign that “Abenomics” is making headway against deflation. However, household spending remained weak, rising only 0.1% versus 0.4% forecast. Industrial production missed as well, rising 3.2% versus 3.9% expected.

See also: The Dreaded Antidote for “Abenomics”

Japan Finance Minister Taro Aso stated that the economic indicators are improving and noted that the data will affect the decision regarding the sales tax. However, the improvements in Japanese economic performance are clearly modest at best, and the imposition of the sales tax could hurt the nascent recovery.

In order to spur growth and reflate the economy, Japanese policymakers need a much weaker Japanese yen (JPY), which would entail USDJPY remaining consistently above the 100.00 level. However, attempts at fiscal responsibility may have the opposite impact if the cooling in demand curbs growth and sends the Nikkei lower, unleashing another round of risk aversion that could strengthen the yen further.

Although USDJPY has been able to find support at the 97.00 figure, the pair continues to be rejected at 98.50 despite better US economic data, and the pair’s overall trend remains down. With the Fed taper story still uncertain and the prospects for the sales tax still dogging the Japanese economy, the pair could remain in this very tight range until next week's US non-farm payrolls (NFP) report provides some much-needed clarity.

By Boris Schlossberg of BK Asset Management

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

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