3 Reasons Why the Yen Could Keep Dropping

Yen bears have been painting the forex town red these days and it looks like they’re just getting the party started. A quick look at the yen pairs’ charts shows that USD/JPY is up more than 600 pips this month, GBP/JPY has climbed nearly a thousand pips, and the rest have rebounded significantly off their monthly lows in just a couple of days.

Yen Pairs 1-hour Forex Charts

Yen Pairs 1-hour Forex Charts

The uptrend has been almost nonstop for USD/JPY and Guppy while other pairs had a late recovery just last week, but more on that later on. Here are a few reasons why traders have been dumping the Japanese yen lately.

1. Sales tax hike delay

Perhaps one of the biggest factors that triggered that sharp yen selloff towards the end of last week is Prime Minister Shinzo Abe’s rumored decision to delay the sales tax hike originally scheduled in April 2017 all the way to October 2019. That’s two and a half years later than initially intended!

Now you might be wondering why this news has been bearish for the Japanese yen when postponing an increase in consumption tax could actually allow domestic spending to stay strong for much longer. While that makes perfectly good economic sense as evidenced by the repercussions from the 2014 sales tax hike, it wouldn’t make much fiscal sense for the Japanese government which has been struggling to get rid of its budget deficit.

In fact, Abe’s leadership has been pushing for a return to a primary surplus by 2020 or risk downgrades from credit rating agencies, which might then open a whole new can of worms for the Japanese economy. Then again, hiking the sales tax earlier could further dampen consumer spending and revive deflationary troubles. For now, it looks like this issue has put the Japanese government between a rock and a hard place, and it doesn’t help that many are speculating that the sales tax hike delay could be politically-motivated as well.

2. Return in USD demand

The Greenback seems to have regained the upper hand in the battle among the lower-yielding currencies, most notably after Fed Chairperson Janet Yellen didn’t shy away from expressing her hawkish views during her latest testimony. You see, even though the U.S. central bank is expected to hike interest rates in a couple more instances this year and Fed officials have shared their upbeat outlook, traders were hesitant to put money on the dollar in anticipation of cautious remarks from Yellen. Back then, the Japanese yen was able to take better advantage of risk-off moves in the forex market.

But when head honcho Yellen grabbed the mic and admitted that a rate hike is “appropriate in the coming months,” fans of lower-yielding currencies took it as a cue to drop their yen holdings in favor of the U.S. dollar. Moving forward, forex junkies could be more inclined to buy up the scrilla rather than the yen in times of risk aversion as long as U.S. economic data supports the idea of a rate hike in June or July.

3. Risk-on vibes?

As I’ve pointed out on the yen pairs’ charts earlier, higher-yielding currencies such as the comdolls have joined the short yen bandwagon during the latter part of this month, possibly indicating a return in risk appetite. After all, crude oil prices have been on a tear then, convincing several market watchers that the commodity slump is already over.

The Nikkei 225 index has also been on a positive streak lately, lifted partly by stronger than expected retail sales and household spending figures from Japan. This could keep Asian session traders hungry for riskier and higher-yielding assets, dampening demand for the Japanese yen in the process.

Of course the current market sentiment could still shift depending on the top-tier catalysts scheduled for this week, particularly that of China’s PMI readings. In addition, U.S. dollar demand could also be dictated by the upcoming NFP release, as downbeat results might hurt speculations of a June Fed rate hike and turn the risk-off tides in favor of the Japanese yen again.