Forex Markets Chew On Japanese Fundamentals

European news has dominated the forex market with a steady narrative of an ongoing saga, making it easy to forget the Europeans do not have a monopoly on a saga of troubled times.  Last night we got no fewer than twelve new fundamental statistical reports on the Japanese economy.  Some of the numbers, like to National Core CPI, the Unemployment rate, Housing Starts, and the Manufacturing PMI, may have little market impact, but there are some important numbers too.
The most important fundamental numbers relate to pronouncements by the Bank of Japan (BOJ).  Earlier this year, when the haven buyers were running up the price of the yen, and putting a severe strain on the Japanese exporter’s profits, the BOJ decided to increase the money supply, devalue the yen, and attempt to cause some inflation in Japan.

The BOJ move was quite timely, initiated in early February, when the large specs were heavily long the yen.  The result was a sell off in the yen from 76 to almost 84 versus the USD.  Since the yen has gained strength, trading back toward the 80 handle.

The market expects that BOJ will expand it’s asset purchase program at todays’s meeting.  The increased supply of yen, combined with the absence of deflation will hopefully lead to a lower yen. 

The strong yen has done significant damage to Japanese exports of electronics and autos.  According to Bloomberg, the yen has appreciated 47% against the USD in the last five years.  The damage to the export trade has been so severe that Japan slipped to a trade deficit.

Japan’s problems go well beyond a trade deficit, and a strong yen.  The ratio of the Japanese government debt is 2.28 to 1, by far the highest in the industrial world.  Currently tax receipts account for less than 50% of the government expenditures.

For an interesting commentary on more Japanese problems, read Three Reasons Japan’s Economic Pain is Getting Worse. They claim:

“Japan’s trade balance is about to go negative for the first time since 1980. Land values and Nikkei stock values have fallen to about 30 percent of 1989 levels. Now, educated young Japanese women are emigrating, Japanese companies are shifting production overseas (even to the U.S.), national politics are in gridlock (six prime ministers in the past five years), and last year Japan experienced its first mass street protests in decades. The economic troubles are symptoms of at least three sets of deeper social problems. Regardless of what policies Japan now adopts, its troubles can only increase unless those social problems are solved. While all three of these also beset other industrial societies, certain local attitudes make them more severe in Japan.”

Most of the comments here pertain to long term trends, not an ideal back drop for highly leveraged forex trades.  Sometimes though you can get a jump on the market, even with a small position when the market gets a surprise.

For the USD, today’s first time claim for unemployment, was again a large number.  Despite the main street media trying to paint a pretty picture, this does not seem to be the case with the unemployment claims.  Perhaps the warm winter weather did give the economy a boost.

Today we also get the US Advanced GDP q/q estimated to be 2.6%, down from 3% in the previous quarter.  This report is another reason to be cautious, but it is a report that may generate some opportunities.

Longer term we wish to be short the yen, but perhaps the C$ might not be a more attractive place for the long side of the pair. The CADJPY did have a move earlier this year from 75 to a bit shy of the 85 handle, and has since backed off to almost 80 before a small rally.  Currently we are at 82.10.  Should today’s volatility give us a chance, we are inclined to try the long side in the 81.40/81.70 area.

CADJPY Japanese Yen

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