This is one of the primary reasons why Bank of Japan Governor Toshihiko Fukui will not be able go on with rate normalization this year, let alone next week. While many central bankers have shown a clear interest in raising rates from their current 0.50 percent amidst fears of inflation stemming from rocketing land prices and tight labor markets, the fact that headline inflation is negative, consumption remains remarkably weak, and Q2 GDP showed an outright contraction really limits the ability of the bank to hike. As a result, the Japanese yen may continue to soften throughout the week. However, if the Federal Reserve makes a surprising decision on Tuesday and leaves rates unchanged, carry trades could unravel rapidly as risk aversion remains the yen’s only friend.
Written by Terri Belkas, Currency Analyst of DailyFX.com