Country Page: Japan
By Valeria Bednarik, Chief Analyst for FXstreet.com
Half 2012 is almost over, and the Japanese yen holds to its unbelievable and unjustified strength: over a year had past since the 2011 earthquake that left the country tumbling.
Before the natural disaster, Japan was emerging from a deep recession that become official by the ends of 2008, when its GDP plummet 12.9% from a year earlier, yet the recovery was interrupted: over the second half of 2011, GDP turned out negative on quarterly basis, only to pick up slightly in the last quarter. This 2012 readings so far have printed -02% in the Q1 and 1.2% for the Q2 reflecting the economic slowdown in the region.
Besides, the world's third largest economy continues suffering from deflationary pressures: consumer prices fall, household spending declines and unemployment grows, reaching 4.6% past April 2012, steady above 4.5% for this 2012. True, there are some light signs of improvement as consumer confidence rose to 40.7 in May his year, compared to the record low of 26.2 by the ends of 2008. But things are far from bright: being an exporter country, Japan's trade deficit surged to a record high in January this year as a strong yen hurt exports and its nuclear crisis resulted in increased fuel imports: the deficit stood at 1.5tn yen as exports dipped 9.3% from a year earlier, while imports rose 9.8%.
And even though, the Japanese yen remains among the strongest currencies of the board. The answer could be find taking a wider look and what's going on else where: the US and the EU faced and face times of doom, leaving safe-haven yen emerge as a survivor of the world turmoil; while other major economies struggle with inflation rates above 2%, Japan lives with a deflationary 1%: this elevates the purchasing capability of the yen as compared to its competitors. Worth’s mentioning also, the Japanese people love to save money, and invest in government bonds, keeping the money at home and therefore, helping the currency to remain strong.
The Japanese yen and its safe-haven status
While long ago, Japanese yen was actually a safe-haven, true is that current ratio of government debt to GDP is among the highest around: in December 2011, it reached 211.70%, far from what should be considered healthy. And still, when risk aversion strikes, yen manages to advance across the board. Why? The answer is two words: Operation Twist
Operation Twist is the latest trick of Bernanke & CO, to boost local growth: the FED, decided to sell short -term Treasuries and buy long-term ones, in attempt to lower long-term bond yields. There is a strong correlation between US treasury yields and the Japanese yen: the latest data available from the U.S. Treasury Department, released this June, showed Japan's overall holdings of U.S. government bonds slipped in April for the second month in a row, to $1.066 trillion, from a peak of $1.085 trillion in February. That is still way above the $881 billion Japan held a year ago.
So, when risk sentiment extends its claws, investors tend to buy US yields; strong demand lowers yields, and lower yields mean stronger yen.
One more thing: the BOJ has attempt several times over the past couple of years to reverse yen strength by intervening FX markets, last time by ends of April this year, taking their asset-purchase fund to 40 trillion; but the bank failed to impress the markets. In fact, authorities lately has been hinting stimulus may not be the right tool, boosting yen across the board.
From the fundamental side, there is little around that favors yen slides for this second half of 2012; the hopes are placed in the new members of the BOJ, suggested by PM Noda and accepted by the Japanese parliament, which are well known as pro stimulus, and may at least attempt to halt yen gains.
Technical outlook
USD/JPY weekly chart shows price in a 75/85 consolidative range, since September 2009. While the long term bearish trend seems to finally have find a floor, there are no much from the technical side that suggests a recovery is near: price trades below 20 and 100 SMA, both around the 80.60 area, also May and June monthly highs. The 100 SMA holds a strong bearish slope, which usually means selling interest remains strong. Indicators hold in the bearish side of the board, another sign recoveries will have to wait. In the daily chart, the pair trades with a quite limited bullish tone as recent recovery was capped by 200 SMA, while 100 one lies around 78.60, which seems a quite interesting floor for the upcoming quarters. Indicators lack upward strength at the time being, pointing for more range ahead. Expect the pair to trade between mentioned 78.60 area and 81.00 for this upcoming 3rd quarter of 2012, while closer to the bottom by the end of the year.
For the EUR/JPY the outlook is strongly bearish in the weekly chart, as latest failure attempt to regain the 100.00 level is seeing a strong increase in the downward momentum: technical indicators had just erased extreme oversold readings before turning back south which suggest the long term trend may extend toward fresh lows in the second half of 2012; 95.60 this year low, is the main bearish target as long as price remains below the 101.60 mark, this June high. In the daily chart, technical signs also show the bearish trend is resuming: price moves away from the 20 SMA , while indicators gain bearish land.
While the technical outlook points for further yen gains, the risk surrounding the region is the main risk factor for a reversal: if growth continues it's deceleration and the BOJ finally takes a more aggressive approach, yen could then give up some real ground. However, as far as the world economic woes persists, little or nothing we can do to fight the dominant trend.
