USD/JPY Fundamental Daily Forecast – BOJ’s Tankan Manufacturing Index Hits 11-Year High

The Dollar/Yen continued to weaken early Friday in reaction to increased demand for lower-yielding assets due to weakness in the higher-risk stock market. Sellers are also lightening up on long positions because of the Fed’s dovish outlook for interest rates. Stronger-than-expected economic data from Japan may be also underpinning the Yen.

At 0927 GMT, the USD/JPY is trading 112.178, down 0.219 or -0.19%.

The major U.S. stock indexes closed lower on Thursday after two Republican Senators raised some concerns about the tax bill. Friday’s session is going to be driven by the same factors that moved the market on Thursday:  interest rates, the dollar and demand for higher-yielding assets.

Interest rates could be moved by a series of minor economic reports. These include the Empire State Manufacturing Index, Capacity Utilization Rate, Industrial Production and TIC Long-Term Purchases.

However, the biggest influence on USD/JPY should be issues over tax reform because they will affect all three key factors. According to reports, Republican Senator Mike Lee was undecided on whether to support the tax bill, while Senator Marco Rubio currently opposes it.

As long as the uncertainty over tax reform exists, investors will seek shelter in lower-yielding assets.

In other news, the Bank of Japan’s headline index for big manufacturers’ sentiment stood at its highest level in eleven years.

The BOJ’s closely watched “tankan” survey came in at 25 in December, up from 22 in September and slightly higher than a median market forecast for plus 24. It matched a high marked in December 2006.

The data shows that big Japanese manufacturers’ business confidence improved for a fifth straight quarter in three months to December to hit an 11-year high. The strong central bank survey is a sign the economy is gathering momentum from robust exports and booming corporate profits.

This data is important because it will be used by the BOJ at its next rate review on December 20-21. The data may help the BOJ make the case that strengthening economic recovery will prompt firms to raise wages and allow it to edge away from crisis-mode stimulus, even before inflation hits the central bank’s elusive 2 percent target.