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Yen Weakness Remains Evasive as Inflation Prints at 34-Month High

Talking Points:

Fundamental Forecast for JPY: Bullish

If you’re looking for longer-term analysis on the Japanese Yen, click here for our Trading Forecasts.

There’s been a tonality change in the Japanese Yen in 2018. After the election of Shinzo Abe in Q4 of 2012, Yen weakness has been a fairly comfortable theme for FX traders to work with. While weakness wasn’t ever-present, it was a fairly prominent theme from 2012 into 2015. As Chinese markets began to wobble in the summer of 2015, Yen strength began to show along with a rise in risk aversion, and after an early-year swoon in 2016, USD/JPY set support around the 100.00 level and bulls came back to push the pair back-above 118.00 before year-end.

And while USD/JPY didn’t exactly burn-higher on the charts last year, the fact that the pair remained range-bound for much of the period highlights just how weak the Yen really was. The US Dollar was in a painful bearish trend that saw as much as -12.3% wiped away, so the fact that USD/JPY see-sawed back-and-forth for much of 2017 indicates that a weak US Dollar was being at least partially offset by a weak Japanese Yen. Away from the Dollar, pairs like EUR/JPY and GBP/JPY put in significant bullish runs that saw fresh highs post in both markets.

But as we’ve turned the page into 2018, that prior theme of Yen-weakness remains elusive. A bit of strength began to show as we opened into the New Year, and that theme has largely remained. In USD/JPY, the range from last year has broken down, and prices have moved down to a fresh yearly low. Last week, we looked at a bit of longer-term support that started to show off of a trend-line projection that makes up the support side of a multi-month symmetrical wedge pattern:

USD/JPY Weekly Chart: Symmetrical Wedge Support Holds the Lows

Yen Weakness Remains Evasive as Inflation Prints at 34-Month High

Chart prepared by James Stanley

What’s Different This Year?

The big differentiating factor this year appears to be a continued rise in Japanese inflation. The BoJ, like many other large Central Banks, harbor an inflation goal of 2%. This goal has largely been elusive over the past couple years, echoing a larger theme that’s been taking place over the past 30 years in the Japanese economy of lackluster inflation and, in some cases even deflation acting as a hindrance to further growth.

Coming into last year, Japanese inflation numbers were hovering at around half-a-percent or less; and this allowed for Yen-weakness to remain prominent as there were few worries or concerns about the BoJ pulling back on stimulus. But, in August, inflation moved up to .6%; and then in December it jumped to one-percent. That December inflation print was released on January 25 of this year, and since then, that theme of Yen-weakness has been even more evasive as bids have started to develop behind the Japanese currency. This would appear to be similar to what happened in the Euro-Zone last year, where a consistent rise in inflation brought bids behind the single currency in anticipation of an eventual taper or exit from stimulus; even as the European Central Bank continually denied that any such moves were on the horizon.

January inflation out of Japan was released yesterday and, again, this came-out with strength. Headline inflation came in at 1.4% for a fresh 34-month high.

Japan Inflation at 34-Month High in January

Yen Weakness Remains Evasive as Inflation Prints at 34-Month High

Chart prepared by James Stanley

Interestingly, the Yen strength that showed-up ahead of yesterday’s inflation print appeared to price that data-in, to some degree, before it ever arrived. A similar scenario took place in January ahead of the release of Japanese inflation, so for those trading this theme, that would be something to keep an eye on; particularly for shorter-term stances.

The lack of outsized bullish response after yesterday’s data release has many attributing that lack of strength to stagnation in core inflation. But, even that would seem a bit disingenuous if looking at the bigger picture, as core inflation continues to hold on to some consistent gains from last year. In December of 2016, Core Inflation was at -.2%; so, in essence, deflation. But, last year saw a strong march-higher here with core printing at .9% in both November and December; matched by another .9% in January.

Japan Core Inflation at .9% For Third Month After Steady Gains in 2017

Yen Weakness Remains Evasive as Inflation Prints at 34-Month High

Chart prepared by James Stanley

Next Week’s Economic Calendar

Next week brings no high-impact economic prints out of Japan as the attention will move to a set of drivers out of the United States. But – this can be a phenomenal time to see how markets might incorporate this recent inflationary pop to Yen price action. For traders looking to trade Yen strength, there may be more attractive setups away from the US Dollar, in pairs such as EUR/JPY or even GBP/JPY. EUR/JPY just set a fresh five-month low, and GBP/JPY is teetering on a trend-line that may not hold for much longer.

The forecast for the Yen will remain at bullish for next week.

To read more:

Are you looking for longer-term analysis on Yen? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on our USD/JPY, EUR/JPY, GBP/JPY, and AUD/JPY pages. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

--- Written by James Stanley, Strategist for DailyFX.com

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