USD/JPY Fundamental Daily Forecast – Demand for Risk Driving US Dollar Lower

The Dollar/Yen is weaker on Tuesday as investors shed the safe-haven greenback on growing optimism about a global recovery from the COVID-19 pandemic. Investors are in a risk-seeking mode, encouraged by ongoing progress in suppressing the coronavirus, which is allowing the gradual reopening of economies. At the same time, the record amounts of fiscal and monetary stimulus that have been put in place by governments and central banks is driving demand for riskier assets. In other news, Japan ended its state of emergency on Monday.

At 10:32 GMT, the USD/JPY is trading 107.679, down 0.050 or -0.05%.

BOJ’s Kuroda: Central Bank Ready to Ease Monetary Policy Further

Bank of Japan Governor Haruhiko Kuroda said on Tuesday the central bank was ready to ease monetary policy further such as by expanding its loan programs, cutting interest rates and ramping up risky asset purchases. Nonetheless, he maintained his gloomy outlook even as a state of emergency was lifted in the capital Tokyo.

“The BOJ is ready to do whatever it can,” Kuroda said in semiannual testimony to parliament.

Kuroda said Japan’s economy and price growth would remain weak for the time being, sticking to his pessimistic view even as the government lifted a state of emergency for Tokyo and four remaining areas on Monday.

“There’s a lot of concern on whether business will return to pre-pandemic levels even when the virus is contained,” he said.

“What’s important now is to ensure markets are stable so that once the pandemic is contained, Japan’s economy can resume a solid recovery path.”

Other News

Prime Minister Shinzo Abe lifted a state of emergency after the number of infections fell across the country. The move meant social distancing curbs would be loosened nationwide.

But many analysts expect the world’s third-largest economy to suffer the fallout from the pandemic for years to come, keeping inflation distant from the BOJ’s elusive 2% target.

Meanwhile, data on Tuesday showed Japan’s services producer prices – or the price companies charge each other for services – fell 0.8% in April from a year earlier when excluding the effect of the sales tax, marking the biggest drop since 2011.

Daily Forecast

Today’s data suggests Japan is going to have a hard-time achieving a V-shaped recovery. Furthermore, the PPI data indicates the output gap is likely to worsen, making the economy vulnerable to deflation.

Japan’s economy is currently in recession for the first time in 4-1/2 years, putting the nation on course for its deepest postwar slump as the virus ravages businesses.

However, the gloomy outlook for the economy may have little effect on the Japanese Yen. With the spread between government bond yields tight, there is very little interest in the carry trade. So as demand continues to increase for risky assets, investors are liquidating long U.S. Dollar positions.

When the spread between U.S. Government Bonds and Japanese Government Bonds was wide, investors would sell Yen and buy Dollars when risk sentiment was bullish. Now they are doing the opposite after many bought dollars for safety during the early stages of the pandemic.

For a look at all of today’s economic events, check out our economic calendar.