• Yen gains 1.47% on the week nears pandemic support line.
  • Yoshihide Suga becomes Prime Minister replacing Shinzo Abe.
  • PM promises to continue Abenomics, structural reform and deregulation prospects cheer yen.
  • Dovish Fed extends zero rates to 2023 weakens dollar, BOJ stands pat.
  • FXStreet sentiment poll points to USD/JPY weakness through the third quarter.

The yen regained its ascendancy against the dollar rising 1.7% on the week after stalling for most of the month, as Japan installed a new prime minister and the Federal Reserve stretched its zero-rate prediction to the end of 2023.

Opening at 106.16 on Monday the USD/JPY closed lower each session and by Friday was resting just above the 104.20 support line that marks the low since the March crisis plunge and recovery.

Chief Cabinet Secretary Yoshihide Suga was elected the 99th Prime Minister of Japan by the Diet following the nearly eight-year rule of Shinzo Abe Japan’s longest-serving leader, who stepped down for health reasons.  

Mr. Suga pledged to continue Abe’s efforts to improve the economy, the so-called three arrows of loose monetary policy and a weaker yen, fiscal spending, and structural and regulatory reforms.

"Reviving the economy remains the top priority of the administration," Suga said in a news conference after becoming prime minister.

The most notable economic success of Abe’s tenure was the devaluation of the yen something he saw as a first step to reviving the economy. Over two years from February 2012 to January 2014 the yen lost almost 40% of its dollar value, with USD/JPY going from 76 to 105.40.  

Japan’s economy improved modestly under Abe’s administration after years of stagnation, though there are many doubts that strong growth is possible with the nation’s massive public debt and a rapidly aging and shrinking population.

Yen weekly strength

Mr. Suga’s arrival, which had been ordained for several weeks, may give the deregulatory and economic revival effort renewed vigor. Combined with the Fed’s dovish extension of low rates until the end of 2023 in the September Projection Materials and the Bank of Japan’s inaction, it reinforced the downtrend in the USD/JPY that extends back to late March and the COVID-19 market panic. 

A longer downtrend originated in January 2017 at 117.50 and its April 2018 low of 104.64 was only pierced twice before this week, in the March panic and then in a brief drop to 104.19 on July 31 which forms current support.

Japan statistics summary: September 14-September 18

Japanese statistics were modestly better than expected, which may have given the yen an additional fillip.

Industrial production in July contracted 15.5% annually, less than the -16.1% forecast and June’s 18.2% decline. It was, however, the tenth negative month in a row.  On the month production rose 8.7%, stronger than the 8% estimate, after the 1.9% rise in June. Production has increased 10.6% in the last two months about half of the three-month decline of 22.4% to May.

Yearly imports were 20.8% weaker in August, slightly over the -18% prediction and though better than July’s -22.3% drop, they extended the contraction to 16 straight months.

Exports (y/y) skidded 14.8% in August, under the -16.1% projection and a substantial improvement from the declines of 19.2% and 26.2% in June and July but the retreat lengthened to 21 months.  

The contraction of Japan’s once world-leading export sector has worsened considerably in the pandemic and its aftermath. In 2019 annual exports decreased an average of 5.5% per month. This year the decrease is 14.5% monthly and the six-month average from March is -20.4%.

Thursday’s Bank of Japan meeting kept its -0.1% base rate and the slightly improved economic description, to “severe state” from “extremely severe state” suggested that no additional support measures will be forthcoming.  The BOJ has eased rate policy twice this year by increasing asset purchases and beginning a loan program for small companies damaged by the crisis.

Overall and core national CPI were weaker than expected in August. Annual prices rose 0.2%, one-third of the 0.6% forecast and down from July’s 0.3% increase. In January the rate was 0.7%. Core prices dropped 0.1% on the year on a 0.4% prediction and July rate. In January the rate was 0.8%.

US statistics summary September 14-September 18

American economic data was generally poorer than expected weighing on the USD/JPY.

Industrial production in August rose 0.4%, less than half the 1% forecast though July was revised to 3.5% from 3%.

Retail sales increased 0.6% in August, missing the 1% expectation and the July figure was revised to 0.9% from 1.2%.  The GDP component control group fell 0.1%, much worse than the 0.5% forecast and its July result was dropped to 0.9% from 1.4%.

The fed funds upper target was unchanged at 0.25% after the FOMC’s Wednesday meeting. As noted above, the extension of current rates to the end of 2023 in the Projection Materials and Chairman Powell’s wary assessment of the US economy continued the Fed’s overtly dovish policy stance.

Initial jobless claims for the week of September 11 were 860,000 down from 893,000 prior. Continuing claims were 12.628 million, below the 13 million forecast and almost one million less than the previous week’s 13.544 million. The stubbornly high jobless figures are one of the chief cautionary notes for the US recovery.

Consumer sentiment in the Michigan Survey was better than anticipated at 78.9 in September, 75 had been predicted and it is now at its post-crisis high, though well below the February reading of 101.   

USD/JPY outlook

The combination of lackluster US statistics, a visibly cautious Fed and a quiet BOJ, a mild retreat of risk sentiment due to rising COVID-19 caseloads in Europe and only slowly withdrawing rates in the US has reinforced the overall downtrend in the USD/JPY.  Or to put it another way, there is nothing in the current markets to question or reverse the continuing and gathering move lower in the USD/JPY. The yen retains its safe-haven status even if the current approach is gradual rather than panic-driven.

Without a substantial improvement in US statistics, the main economic variable, there is little reason for traders to change this view.

At first blush, the USD/JPY reversed at 104.20 on Friday but support there is not strong as it represents a brief one-day low without sustained price action.  The March panic lows can be ignored as a guide to future sentiment.  Prior support ranges from 100 to 105, but it stems from the second half of 2016 and is weakened by age. The area between 104.00 and 103.00 is largely barren of support.  It was only traded for two days at the height of the COVID panic and price points from four years ago have scant relevance. 

One caveat to the slide in USD/JPY could come from the new Suga administration in Tokyo. 

The Abe administration made its economic reputation on its successful devaluation of the yen, which is characterized as an irrational impediment to Japan’s export-driven economy. The initial rise in USD/JPY halted at about 105 and then ranged from there down to 101 from January 2014 to that September.  Will the new government want to cripple its nascent export and economic policies with an ever more expensive yen?  

Whether the BOJ has the financial firepower or the will to attempt an arrest of the strengthening yen is open to question. The same is true for the impact of any supplemental budget forthcoming from Tokyo. 

Japan statistics September 14-September 18

US statistics September 14-September 18

Japan statistics September 21-September 25

The Jibun Bank Manufacturing PMI for September will give the first look at the factory sector.  This secondary indicator has been under 50 and in contraction for 16 months. Little change is expected and it will have no impact on markets. The All Industry Activity Index is for July and retrograde whatever it results. 

US statistics September 21-September 25

Existing home sales are 90% of the US housing market and they have rebounded sharply from the COVID closures. The July annualized rate of 5.86 million was the best since the declining days of the housing bubble in mid-2007. The surge of sales in June and July confirms that large swaths of the US economy are healthy.

Markit's purchasing managers' indexes for September – manufacturing, services and composite – are expected to be largely unchanged, but a better-than-expected result could provide modest support for the dollar. 

Chairman Powell will testify in the House on Wednesday at the Select Subcommittee on the Coronavirus Crisis on the Fed's pandemic response. While no new information is expected, Mr. Powell's comments always have potential market impact. 

Mr. Powell and Treasury Secretary Mnuchin will testify before the Senate Banking Committee on the topic of coronavirus relief on Thursday with the same market stipulation. Initial jobless claims have receded in immediate effect, but their continuing high level makes an unexpected drop would possibly provide a boost to the dollar.  

USD/JPY technical outlook

The Relative Strength Index (RSI) at 32.32 is just above oversold status, but given the fundamental picture and the lack of substantive support, it is not yet a reversal signal.  The moving averages are all resistance adjuncts with the 21-day at 105.04 backing the line at 105.00, the 100-day at 106.75 and the 200-day at 107.74 are out of the current technical outlook and await a reversal in the USD/JPY for relevance.  

Given the range trading in August and September, resistance lines are more plentiful and of greater weight with the 105.00 and 105.50 the most important in determining whether the USD/JPY remains offered. Support at 104.20 is of recent vintage, but the lines below have a dual pedigree from the short-lived panic in March and from the second half of 2016, and they are duly weaker.

The technical view favors continued downward movement with numerous and well-appointed resistance above, two active channels and limited and weak support lines.

Resistance: 104.75; 105.00; 105.50; 106.00; 106.40

Support: 104.20; 104.00; 103.00; 102.75

USD/JPY sentiment poll

The uniformly bearish predictions of last week were fulfilled with even the one-quarter forecast at 104.98 proving inadequate to the USD/JPY movement. 

This week's sentiment poll sees another attempt at the downside with at 104.08 forecasted, but the longer outlooks predict stasis. With forecasts at 105.06 in both the one-month and the one-quarter view, it is clear our expert consensus does not anticipate a trend reversal.  This coincides with the fundamental picture where the US economy has yet to generate a convincing rationale for dollar strength. 

USD/JPY Forecast Poll

 

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