USD/JPY Fundamental Daily Forecast – End of Trade Dispute Would Help Ease Japan’s Economic Pains

The Dollar/Yen is trading marginally lower early Monday as investors are showing no reaction to the rise in U.S. Treasury yields and increased demand for risky assets. Surprisingly, investors are also showing a slightly bearish response to positive developments over a U.S.-China trade deal. Over the week-end, President Trump announced he is planning to delay a menu of additional Chinese tariffs that were scheduled to begin on March 1.

At 06:56 GMT, the USD/JPY is trading 110.617, down 0.044 or -0.05%.

In economic news, Japan’s Services Producer Price Index SPPI came in as expected at 1.1%. This index shows the change in price of services purchased by corporations.

Overall, the Japanese economy continues to struggle, led by weakness in manufacturing. The trade dispute between the United States and China has also taken its toll on Japan’s economy with the slowdown in China dampening appetite for Japanese exports. Reports showed that Core Machinery Orders were weaker by 0.1% in December, after a flat reading of 0.0% a month earlier. Manufacturing PMI fell to 48.5, indicating the first contraction since April 2016.

Bank of Japan Chatter

Early last week, Bank of Japan Governor Haruhiko Kuroda warned about the BOJ’s readiness to ease policy further if sharp Yen rises damage the economy.

On Friday, Kuroda said the central bank would “of course” consider easing monetary policy further if the economy lost momentum toward achieving its 2 percent inflation target, the Asahi newspaper reported.

Daily Forecast

The subdued inflation in Japan has left the BOJ well behind the more aggressive moves by the United States and Europe to take back its financial crisis policies. This leaves it with very little ammunition to battle an abrupt spike in the Japanese Yen that could derail an export-driven economic recovery.

Furthermore, despite Kuroda’s “threat” of additional stimulus, it’s not likely a done deal due to expected opposition from other BOJ policymakers. Years of heavy money printing has dried up market liquidity and hurt commercial banks’ profits, stoking concern over the rising risks of prolonged easing.

Today’s USD/JPY weakness represents a positive response from Japanese Yen investors to the possibility that the U.S. and China are headed towards a trade deal. This would be good news for the Japanese economy.

U.S.-China trade tensions and fears of a global slowdown have added to the BOJ’s problems. Japan’s exports in January posted their biggest decline in more than two years and manufacturing activity contracted in February for the first time in two-and-half years, a sign the economy is feeling pain from slowing Chinese demand. An end of the trade dispute would help ease some of these pains.