- USD/JPY breaks through ¥118 price level
- BoJ still confident on 2% inflation target
- OPEC decision fallout could benefit Asia
Softer economic data out of Japan drove the USD/JPY higher even after policymakers and analysts stated that the JPY was weak enough. Inflation continued gaining year-over-year, but it has been doing so at the slowest pace since the April sales tax hike was imposed on the island nation. Core inflation fell below 1%, and there are growing concerns that with cheaper energy prices Japan won’t get any inflation boost through imports.
Exports have grown at a faster pace in Japan but not even a weaker yen has been able to significantly change the course of the economy. The main reason for this is that following a globalization and cost reduction strategy, Japan has outsourced almost a third of its manufacturing. For comparison, in the 1980s only a tenth of Japanese companies manufactured out of Japan. This shift makes it hard for yen weakness to boost exports overnight and it reduces the overall impact they can have on the bottom line of corporations.
Bank of Japan (BoJ) Governor Haruhiko Kuroda said the central bank is ready to act if needed earlier in the week. According to Kuroda, the soft yen is having a negative effect on the Japanese economy. The yen received a boost after the BoJ minutes showed that some policymakers opposed the BoJ’s decision to expand its stimulus program in October. At that time, the BoJ shocked the markets when it increased its government debt purchases from ¥60-70 trillion to ¥80 trillion per year. The division within the BoJ could make it harder on Kuroda to introduce further stimulus. The governor stressed the need to act now, and the measure is seen as a pre-emptive move to avoid Japan losing even more momentum after the April sales tax hike.
The Organization of the Petroleum Exporting Countries (OPEC) held its production setting meeting this week in Vienna. There was much speculation regarding the final decision as the price of crude has been falling as demand continues to shrink while production continues unchanged. Oil producing countries were disappointed as OPEC maintained its 30 million barrels-a-day ceiling while the price of oil around the world dropped below US$80. Asia has been one of the winners as energy importing nations such as China, Japan, and India have been taking advantage of low prices. For Japan it is a mixed bag, as there is a trade deficit benefit, but also an inflation hit.
Next Week For Asia:
The bulk of the market’s attention will again be on central bank decisions and reactions. It all starts with the gold referendum in Switzerland on Sunday. No matter which way the vote goes, investors will want to cash in on some of their existing positions. Meanwhile, the Reserve Bank of Australia’s rate decision will kickstart Australasia’s week. The Bank of England, European Central Bank, and the Bank of Canada will all make public statements in the middle of the week before giving way to the No. 1 economic indicator: the U.S. nonfarm payrolls report on Friday.
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