USD/JPY – Yen Continues to Drop As Japan Outlines Stimulus Program

The Japanese yen continues to lose ground against the US dollar, following the announcement by the Japanese government of a new stimulus package. The yen responded by briefly breaking past the 89 level. The yen also lost ground after Japanese Current Account was released. The key indicator was well below market expectations. There was some good news, as Economy Watchers Sentiment was well above the estimate. In the US, Unemployment Claims continues to look weak, as the key employment indicator failed to meet the estimate for the second straight reading. Friday looks to be a quiet day, with just three releases, all out of the US. The highlight is US Trade Balance.

Since taking office a short time ago, the new Japanese Prime Minister, Shinzo Abe has promised dramatic change, and he has wasted little time keeping his word. On Friday, Abe announced a new stimulus program, worth $224 billion. The government says the new program will kick-start the languishing Japanese economy and could create up to 600,000 new jobs. The stimulus program is a major plank of Abe’s ambitious economic platform, intended to stimulate economic growth. The government is determined to stamp out deflation, which has been a long-term problem for the sluggish Japanese economy.

The prime minister reiterated that he wants the Bank of Japan to raise its inflation target to 2%. The BOJ, which currently has a target of just 1%, meets later this month, and analysts expect that the powerful central bank will comply. The government has declared that it wants to see a weaker (“more competitive”) yen, and the results have indeed been tangible. The Japanese currency has declined about 8 per cent against the US dollar since mid-November. However, there is unease in the US and other countries at the sharp drop in the value of the yen. The US has stated that it would prefer to see the Japanese government take steps that will directly facilitate growth in the economy, rather than use the “hammer” of monetary easing to manipulate the value of the yen.

The US managed to dodge the fiscal cliff bullet last week, as Congress managed to craft together a compromise which all sides could agree to, albeit with some reluctance. However, the story is by no means over, and this recent battle, which grabbed the news headlines for several weeks, appears to have just been the first round. More battles are imminent, as the hard-fought fiscal cliff deal left two critical issues – the debt ceiling and spending cuts, for another day.

Democrats and Republicans are likely to tangle in Congress at the end of February, as the country reaches the $16.4 trillion debt ceiling. If the debt ceiling is not raised (yet again), we could see the US government default on its debt, which undoubtedly would cause chaos in the markets. Republicans have vowed to condition raising the debt ceiling on deep spending cuts, which the Democrats strongly oppose. In March, the fiscal cliff could again rear its head, as $110 billion in spending cuts will kick in if Congress cannot agree on a new budget.

Taking a look at fundamentals, Japanese Current Account, a key indicator, was a big disappointment. The monthly surplus fell sharply to 0.23 trillion yen in December. This was well below the market estimate of 0.31T. The dismal reading helped to push down the struggling yen even further. Bank Lending rose 1.2%, a slight improvement from the previous reading. Wrapping up the trading week, Economy Watchers Sentiment looked sharp, coming in at 45.8 points. This was much better than the forecast of 45.1.

USD/JPY for Friday, January 11, 2013

USD/JPY Jan 11 at 11:40 GMT

88.88 H: 89.28 L: 88.77

USD/JPY Technical

S3 S2 S1 R1 R2 R3
87.36 87.95 88.55 89.31 89.85 90.23


The yen continues to sag, and USD/JPY is currently testing the 89 level. The next line of resistance is at 89.31, and this line cannot be considered safe, as the pair continues to push higher. On the downside, 88.55 is providing support. This is followed by 87.95, which has strengthened as the pair trades at higher levels.

• Current range: 87.95 to 88.55.

Further levels in both directions:
• Below: 88.55, 87.95, 87.36, 86.97, 86.37 and 86.
• Above: 88.55, 89.31, 89.85, 90.23 and 90.91.

OANDA’s Open Position Ratios

The USD/JPY ratio is currently showing some movement towards long positions. This bias in trader sentiment could be an indication that the yen will continue to lose ground against the dollar. The bias is being reflected in the pair’s current movement, as the dollar continues to push hard against the struggling yen.

Following the Japanese government’s new stimulus package, the yen continued to slump, and the pair briefly broke above the 89 level? Will the upward trend continue? The markets are expecting more easing by the powerful Bank of Japan, so there is more room for the yen to continue to slide.

USD/JPY Fundamentals

• 5:00 Japanese Economy Watchers Sentiment. Estimate 41.1 points. Actual 45.8 points
• 13:30 US Trade Balance. Estimate -41.1B
• 13:30 US Import Prices. Estimate 0.1%
• 19:00 US Federal Budget Balance. Estimate -11.6B

*Key releases are highlighted in bold
*All release times are GMT

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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Kenny Fisher

Kenny Fisher

Currency Analyst at Market Pulse
Kenny Fisher joined OANDA in 2012 as a Currency Analyst. Kenny writes a daily column about current economic and political developments affecting the major currency pairs, with a focus on fundamental analysis. Kenny began his career in forex at Bendix Foreign Exchange in Toronto, where he worked as a Corporate Account Manager for over seven years.