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How Will the Yen React to November Inflation? Review the Fundamentals!

How Will the Yen React to November Inflation? Review the Fundamentals!

Benjamin Spier, Technical Strategist

Talking Points:

  • Check the fundamental factors affecting Yen trading ahead of tonight’s inflation release.
  • The BoJ remains obsessed with its 2% inflation target going into 2014.
  • The Yen continues to trade inversely to the Nikkei equities index.

Yen Fundamental Factors







Monetary Policy

Following the December policy meeting, the BoJ announced it would continue with the current rate of 60 to 70 trillion Yen of monthly stimulus. The BoJ said in a statement that inflation expectations seem to be rising, and the central bank reiterated that there is significant scope to boost bond purchases if needed to achieve the price target.

In November, Governor Kuroda said the BoJ is on track to reach its inflation target.

In Kuroda's first BoJ meeting in April, the central bank agreed to double the monetary base by 2014, including buying longer term debt, with the goal of reaching 2% inflation within two years. The tactic was so aggressive that it surprised traders and sent the Yen about 700 pips higher against the dollar to nearly 100.00 after the announcement.

The BoJ maintains the key overnight rate at 0% to 0.1%.


If the Bank of Japan decides to further increase its monetary stimulus, it is Yen negative because it will increase the supply of Yen and lower yields on government bonds.


Economic Growth

Japanese GDP rose 1.1% in Q3 (annualized), following 3.6% growth in Q2.

In October, the central bank predicted 1.5% GDP growth in 2014.


Improved growth is Yen negative because the Yen tends to perform as a safe haven and trade inversely to the Nikkei index. The BoJ's focus on inflation means that economic growth has less of an effect on monetary policy.



Japanese annual inflation (excluding fresh food) rose 0.9% in October, the highest inflation since November 2008 and up from 0.7% inflation in September.

The BoJ maintains a 2% inflation target. The central bank reiterated its forecast in October for 1.3% core inflation in FY 2014 and the 2015 core inflation rate at 1.9%.


Higher inflation is Yen positive as it encourages tighter monetary policy.


Correlation to the Nikkei

On a yearly basis, USDJPY has a correlation of about 0.41 to the Nikkei 225 index.

Over the past month of trading, the correlation between USD/JPY and the Nikkei index has fallen slightly to 0.39.

This means that the Yen often trades in the opposite direction of the local equities index.


The Yen will often decline on news that sends the Nikkei higher. This means that news that is good for the economy may end up driving the Yen lower, because of its safe haven status.



Abenomics is a three "arrow" approach to fixing the economy: fiscal stimulus, monetary stimulus, and looser regulations. In June, Abe spoke about a campaign to loosen rules on businesses over the course of 2013.


Should Abe's plan successfully stimulate the economy, it might be perceived as Yen negative, because the Yen has served as a safe haven currency.


Rise in Sales Tax

PM Abe decided at the end of September to raise the consumption tax rate to 8% in April from 5%. Abe also will release a 5 trillion Yen stimulus package to balance out initial effects of the tax hike on the economy. Raising taxes may drag on consumption, thereby sending the Nikkei lower, and therefore supports the Yen's status as a safe-haven currency.


Further fiscal stimulus to the economy may send the Nikkei equities index higher, which might be considered Yen negative because of its negative correlation to the Nikkei. Austerity would have the opposite effect.



The jobless rate remained at 4.0% in November.


A lower jobless rate may indicate a stronger Japanese economy and send the Nikkei index higher, which is JPY negative.

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to .

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