The Japanese Yen Tug-o-War

Any bets on where USD/JPY will be trading by the end of the year? Do I hear 100.00 or 105.00? Here are the opposing factors playing tug-o-war on the Japanese yen these days.

Bleak Japanese economic data

A review of the economic calendar would reveal that data from Japan has been dismal to say the least. The Q2 2014 GDP reading marked a sharp 1.7% quarterly contraction, bringing the annualized pace of growth down by 6.8%. That’s the country’s largest contraction since the earthquake and tsunami struck in 2011!

Prior to the GDP release, the tertiary industry activity index showed a 0.1% decline for June, chalking up its third consecutive month of weaker than expected readings. Retail sales for the same month slumped by 0.6%, following May’s 0.4% decline in consumer spending and April’s 4.4% drop. Industrial production has been faring much worse, as the report has seen five straight months of worse than expected results, with the latest release showing a 3.3% decline.

Of course some would be quick to blame the April sales tax hike for putting a drag on overall economic activity, but it has already been more than three months and Japan is still reeling from its effects. Is the negative impact really temporary or is it threatening to push the country into another economic meltdown? The latter could mean more losses for the yen!japanese yen sumo wrestler

Optimistic BOJ stance

Although data has been weak, the BOJ remains adamant that the Japanese economy can get back on its feet sooner rather than later. Policymakers appear confident that Japan can resume its strong performance in a few months, providing support for the yen for now.

In the latest BOJ statement, Governor Kuroda reiterated that the economy is still on a moderate recovery and that it is on track to meet the central bank’s 2% inflation target. This dashed hopes of seeing further easing from the BOJ, which could potentially drive USD/JPY hundreds of pips higher. Kuroda added that the Japanese economy could expand “above its potential” later on, as the recent downturn is also being compounded by cyclical factors.

In a nutshell, BOJ policymakers are convinced that the bleak economic reports are just small road bumps and are not long-term concerns. However, there could be a chance of seeing a shift in tone if Japan fails to post stellar figures in the coming months. Even then, BOJ policymakers might stay stubborn enough to delay any additional easing until next year.

At what levels do you think USD/JPY will be trading by the end of this year? Share your thoughts in our comment box or cast your votes in our poll below!