Since hitting a 101.50 low back in March, the Japanese Yen has rallied sharply over the last five months against the U.S. dollar. Now trading just a haircut above 91.00, some in the market are questioning whether there is more gasoline in the tank for the currency to move further in the coming months.
Fundamentals point to a resounding “yes” following tonight’s economic growth figures. Expected to have been in recovery mode since before August, it seems that facts have surfaced negating the optimism previously hoped for.
Yen Set To Move Higher?
Fading Growth
According to the Cabinet Office in Tokyo, gross domestic product for the second quarter actually expanded by a milder 2.3 percent. This new figure pales in comparison to the brighter 3.7 percent that was expected for the three month period ending in June.
Ultimately, the downgrade was led by lower consumer spending figures as record high unemployment continues to plague the land of the rising sun. Unemployment has risen to 5.7 percent, the highest in over half a century. According to the recent figures, jobless woes aided in bringing down retail sales figures for the 11th month.
The effects are similar to the United States, where consumers have been cutting back on consumption due to unemployment figures which are expected to top 10 percent by this time next year.
Manufacturing and industrial production additionally took a hit as exports declined rapidly to the tune of 36.5 percent. The slower pace of activity has crippled once mighty factories located in central Japan, slowing production for the fourth month according to the Trade Ministry.
The subsequent deceleration is likely to place further weight on GDP in the near future, helping to put a heavy drag on any expansion in the next quarter. Incidentally, the picture is unlikely to improve as higher exchange rates with other trade countries are likely to make Japanese made goods unattractive. As the Yen currency rises higher, so does the cost of owning goods produced in Japan.
All this talk of slower growth will more than likely place the world economic recovery notion at risk. Are all industrialized economies expected to experience further weakness? Were earlier estimates of a V-shaped recovery all bunk?
The more questions that arise, the higher the likelihood that a repeat of risk aversion may help to boost the Japanese Yen over other counter currencies. Ultimately, this may help to foster a technical support at below the pivotal 90 level, with some rising notions of a retest of the 87.50 figure.
Political Caveat
Once again, a political caveat continues to hang in the shape of the new administration. With the current economic situation remaining questionable, it will be interesting to see how campaign promises may be filled.
During the campaign, the DPJ party continued to make promises of further economic stimulus through cash handouts and infrastructure spending to boost general consumption without the heavy hand of debt issuance. If the reigning party is able to revive the country’s outlook, it may be just enough to curtail any further USDJPY shorting as risk momentum on growth expectations continue.
