USDJPY: Straddling the 111 area

Research Team at BBH, notes that the dollar, which was straddling the JPY110 area last week, is now straddling the JPY111 area.

Key Quotes

“The price action continues to support the US and European position at recent G7/G20 meetings that Japanese intervention was unnecessary. The market has pushed the dollar from JPY105.50 on May 3 to a high yesterday just shy of JPY111.45. The JPY111.80 area (seen in late April) to JPY112.00 is the nearby ceiling.

There have been several Japanese economic reports in the last two sessions, but none convince the market that the Abe government will provide fresh fiscal stimulus (including postponing the sales tax increase). Many are looking for more support from the BOJ, with July seen as more likely than June.

On balance, the data (from retail sales and overall household spending, the job-to-applicant ratio, and industrial output) were firmer than expected. One key takeaway is that the recent earthquake was not as economically disruptive as had been feared given the supply chains that were exposed. Nevertheless, Japan's Finance Minister Aso, who at the G7 finance ministers meeting had indicated the official intention of pressing ahead with the sales tax increase, has backpedalled. At a press conference tomorrow, Abe is expected to make a delay official.

Nevertheless, the fact that the data was mostly better than expected does not conceal the fact that in absolute terms, the economy is still struggling to sustain positive momentum. For example, retail sales and overall household spending is still falling on a year-over-year basis. Industrial output is 3.5% lower than a year ago, and was the second-largest decline since the late 2014 even though it was up 0.3% in April (median forecast was for a 1.5% fall). Recall Japan's manufacturing PMI fell for the fifth month in May to 47.6 (preliminary reading, the final report will be released in Tokyo first thing on Wednesday).”

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