USD/JPY Monthly Fundamental Forecast December 2012

Outlook and Recommendation

The USD/JPY climbed this month as political uncertainty drop the pair to 82.47. Entering December, JPY is the worst performing major, having lost 6.5% year-to-date. An upcoming election on December 16th has driven uncertainty, particularly as deflation becomes politically intolerable. When Bank of Japan governor Shirakawa completes his term in April 2013 he is likely to be replaced with an aggressive head, who will be more closely tied to the government. Based on these developments, sentiment has soured dramatically against the yen. General elections will be held on December 16th as a result of the passage of a deficit financing bill; the promise for early election was a condition for the bill’s approval in the upper house. Consequently, the outgoing government will implement additional fiscal stimulus measures to prop up the weak economy before its term comes to an end. Given the deteriorating economic outlook, the Bank of Japan is under pressure to loosen monetary conditions further

Meanwhile, domestic demand is being adversely impacted by deflationary pressures that make borrowing unappealing and encourage consumers and companies to postpone spending. Accordingly, we have revised Japan’s 2012 output growth forecast downwards to 1.7%, and expect the economy to record only a modest average gain of 1.1% in 2013-14 as the impact of the tsunami-related reconstruction boom wanes.

FxEmpire provides in-depth analysis for each currency and commodity we review. Fundamental analysis is provided in three components. We provide a detailed monthly analysis and forecast at the beginning of each month. Then we provide more recent analysis and information in our weekly reports and we provide daily updates and outlooks.

Central Bank – The Bank of Japan

Date of next meeting or last meeting: December 20, 2012

Current Rate: 0.10%

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