Week in FX Asia – Japan’s Sales Tax Headache to Force BOJ Intervention

  • USD/JPY Rises to above 107 on strong dollar
  • Kuroda and Abe discuss BOJ further stimulus
  • Australian Dollar on the back foot despite impressive employment figures

The rise of the USD has been unstoppable as positive economic data has convinced the market that the Federal Reserve will hike rates sooner rather than later. The USD/JPY has broken the 107 barrier and has further to advance as BOJ Governor meets with the PM Shinzo Abe to confirm that the central bank will act when needed. This time last year the pair was above 100 and with a 52 week range with current levels as the high and 96.57 as the low as the Fed was yet to announced the schedule of the taper program. Now a year has passed and the taper is soon to end.

The Yen is touching lows not seen since 2008. Japanese companies will benefit from a weaker JPY giving exports a competitive edge. Energy imports after the nuclear reactor disaster have dampened the overall boost to the island nation growth. More costly imports on a weaker JPY have influenced inflation but have widened the deficit even as exports continue to grow.

The Trans-Pacific Partnership is an opportunity for Japan to regain its exporting mojo as the diplomatic relations with China has hurt overall exports to the other Asian powerhouse. Subsidies and protectionist pact in Japan might yet derail Japan’s involvement in the agreement. The US and Japan have so far met multiple times on auto and farm tariffs with little progress.

Bank of Japan Governor Haruhiko Kuroda met with Prime Minister Shinzo Abe this week and told the market that he reassured the Japanese Leader about the central bank’s intervention. Kuroda says the BOJ is ready to act if needed. This is the default phrase used by all central bankers when they are pressured by the media. Abenomics has struggled to regain the market’s confidence after a roaring start in 2013. With a recently elected PM Abe and a newly appointed Kuroda the BOJ introduced a bold first move in an effort to reach the 2 percent inflation target promised by Abe. The USD/JPY quickly surged in an effort that boosted the local stock exchange. The efforts were specially effective given the inaction that other central banks like the Federal Reserve, the Bank of England and the European Central Bank brought to the table in 2013.

This year the BOJ has under performed, or rather not performed at all. Kuroda went from an aggressive policy maker, to a passive watcher of the Japanese economy. Analysts continue to question what is it that he does see as the central banker continues to maintain a positive outlook on the economy even as he has had to admit that the effects of the sales tax increase have been more than “transitory”. PM Abe needed to introduce the sales tax increase if Japan was ever to reduce the fiscal deficit, but the timing could have been better as it took the wind out of a weak recovery. Now the government will look at the third quarter results to decide the fate of the next phase of the hike.

Abe hinted that he needed a partner in the BOJ during his campaign and criticized the then current governor of the bank. After his return to the top job in Japan he made sure to hand pick a governor that subscribed to his lofty inflation target, he found his man in Kuroda. Now as the Federal Reserve is on the final stages of their tapering of bond-buying the Japanese policy makers are faced with a way to achieve inflation targets through imported inflation as the price of energy skyrockets versus a weaker JPY.

Australian employment numbers made headlines on Thursday, as Employment Change posted an incredible gain of 121,000 last month, crushing the estimate of 15,000. The markets are having some difficulty accepting these stratospheric figures at face value, with one Australian analyst noting that the numbers are “somewhat difficult to interpret”. The Australian statistics bureau claimed that a rotation in its survey group affected the August figures, and we’re likely to hear more about the authenticity of these numbers in the next few days. There were no doubts about the veracity of the unemployment rate, which dipped to 6.1%, beating the estimate of 6.3%. The Aussie posted gains after the employment releases but then retracted and continued to head southward.

The Australian dollar is sensitive to key Chinese releases, as China is Australia’s biggest trading partner. Chinese Trade Balance hit a record high in August, as the surplus climbed to $49.8 billion, easily beating the estimate of $40.8 billion. Stronger Chinese exports should translate into increased demand for Australian raw materials, which bodes well for the Australian export sector and the Aussie. On Thursday, Chinese CPI came in at 2.0%, as the index fell to a 4-month low.

Next Week For Asia:

Next week again will mark a western bias as the Reserve Bank of Australia’s minutes and the Bank of Japan Governor Kuroda Speech on September 16 with business leaders in Osaka and on the Securities Industry Convention in Tokyo on the 18 are the biggest impact events on the agenda.

The eyes of the market will be glued to the Scottish referendum as even the Bank of England’s governor had to skip the G20 meeting as the outcome could have major implications for the Union.

The Federal Reserve meeting on monetary policy ends on Wednesday. No change is expected in terms of the published rate and the pace of the taper which enters its final meetings. There is the expectation that they could alter the pace slightly to make sure that the meeting after next is the last one. Currently there is still a monthly 25 billion amount. The usual cut of 10 would leave 15 billion for next meeting. One option doing the rounds is that they could rise it slightly to 12.5 billion. Given how forward guidance is under review there is little expectation for Fed creativity so no change is the most likely outcome.

Fore more market moving events visit the MarketPulse Economic Calendar


* CNY New Yuan Loans
* GBP Consumer Price Index
* EUR German ZEW Survey (Economic Sentiment)
* GBP Bank of England Minutes
* USD Consumer Price Index
* USD Federal Open Market Committee Rate Decision
* NZD Gross Domestic Product
* CHF Swiss National Bank Rate Decision
* CAD Consumer Price Index

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.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza