Another False Dawn for USDJPY?

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Japan’s inflation data printed a bit better than expected but remained in deflationary mode, indicating that the country’s monetary policy is failing to to achieve its goals. Japan’s CPI printed at -0.1% a bit better than the -0.2% expected but still negative for the third month in a row. Economics MInister Seiji Maehara called on joint government action to combat deflation.

After a cabinet meeting, Mr. Maehera stated that,””Central banks around the world are easing monetary policy. The BOJ itself set a 1 percent inflation goal in February but that hasn’t been achieved. As price falls are continuing, I want to ask the central bank to pursue powerful monetary easing.”

Policymakers attitude towards deflation have now shifted from concern to a near state of panic as Japan’s economic growth slowed markedly in the second half of the year, due to dispute with China and stubbornly strong yen. The country’s Trade Balance figures recorded their worst deficit ever in the first half of the fiscal year and Japan’s economy after outpefroming G-3 in the first half of the year is now lagging behind.

Yesterday’s story in the Nikkei newspaper that the BOJ will expand its asset purchase program by 10 trillion yen at its meeting next week helped push USDJPY through the 80.00 level for the first time in four months but the pair has fallen back below that barrier in tonight’s Asian session trade as risk aversion flows and scepticism from investors keeps a lid on the rally.

With no meaningful economic data in Europe USD/JPY is likely to tread water until North American trade when focus will shift to US GDP figures. If the number proves better than the 1.8% expected it could provide the lift to push the pair back above the 80.00 figure, but a sustained rally in the pair is unlikely unless BOJ officials next week abandon their gradualistic attitude towards monetary policy and adopt a much more aggressive stance vis a vis QE.

Boris Schlossberg
Managing Director

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