Yen: Further Weakening Ahead

Japan is a global economic powerhouse, and also one of my most favourite currencies to watch as a trader and researcher. Over the last 50 years, the Japanese economy has been transformed heavily and has grown rapidly before heading into the ‘lost decade’ of the 90’s, where the economy stagnated and deflation set in. However, since the advent of Abenomics and a complete paradigm shift in the halls of power at the Bank of Japan, big things have happened. Shinzo Abe has flipped the economy on his head and begun a Keynesian style war with the economy as he floods the market with stimulus in order to lift inflation, and so far markets have believed in him.

Yesterday, we had the Tertiary Industry Index, which showed a decline in services of -0.2%. For those that are not used to the Tertiary Industry Index, it basically covers the services sector of the Japanese economy and the growth rate for those services. Today also, core machinery orders for the Japanese economy fell, as Capex spending slowed in line with expectations. However, all of this has accumulated and put more pressure on the Yen to break out of its recent triangle, and come tonight in the markets, we will see more reporting of a negative nature, as Japan’s GDP forecasts are expected to weaken.

All of this certainly spells out to me a further weakening of the Yen and the return of its 100.00 mark. Looking forward, it will be interesting to see how markets react to this weakening of the economy as of late, after the upturn for the Japanese economy. Overall though, I certainly feel that more weakness is in the pipeline for the Yen, with a US economy ticking over and getting stronger. It is likely people will ditch the safety of the Yen and head back into other currencies and riskier assets.

Undoubtedly, my outlook on the USD/JPY pair is bullish, after the events of today and the recent breakout.

Written by Alex Gurr, Currency Analyst at Blackwell Global.