USD/JPY: Yen to Drop as Economic Threats Mount

The Japanese yen is foreseen to dip opposite the US dollar today as prospects for the Japanese economy continue to weaken while the US released a buoyant jobs report. Japan’s tertiary industry activity inclined less than expected in August while the continuing territorial dispute with China has forced analysts to downgrade their assessment for the economy.

Earlier today, METI reported that the Tertiary Industry Activity index rose by a meager 0.4 percent in August. Although the figure represents a marked improvement from the 0.7 percent fall in July, it still came up short to the 0.5 percent median estimates. Yesterday, a report also revealed the Core Machinery Orders plunged by 3.3 percent in August to overturn a 4.6 percent rise in the previous month. Taken together, the findings suggest that companies will restrain spending as global demand continues to slow, underscoring the growing risk of an economic contraction in the world’s third largest economy. The nation is also continuing to endure a deflationary environment. The Bank of Japan reported that the Corporate Goods Price Index fell by 1.4 percent in September following the 1.9 percent dip in August. This marked the sixth consecutive monthly drop in the index.

Meanwhile, analysts caution that the ongoing spat with China over the disputed islands in the East China Sea are threatening to take its toll on Japan, which could send its recovery from last year’s disasters into reverse. The disputes have set off violent protests in China and a widespread call to boycott Japanese goods. Chinese tourists are calling off trips to Japan and some experts say that the Japanese economy will contract in the December quarter. Earlier this week, J.P. Morgan released a report saying that it estimates auto exports to China to plunge by 70 percent in Q4 and the export of auto parts to sink by 40 percent. Indeed, the grim indications have already begun to emerge. Toyota’s new vehicle sales in China dropped by 49 percent in September from a year earlier. Honda’s September sales fell by 41 percent while Nissan recorded a 35 percent drop in sales last month. As a result, J.P. Morgan forecasts the world’s third largest economy to contract by 0.8 percent in the fourth quarter.

Across the Pacific, optimism over the US labor sector is seen to shore up demand for the Greenback. Applications for jobless benefits declined 30,000 to 339,000 last week to reach its lowest level since February 2008. The dwindling trend in lay-offs suggests that employers are foreseeing sufficient demand to maintain current staff, a necessary first step to larger hiring gains. With the report reflecting a gradually improving jobs sector, the US dollar is seen to incline, warranting a long position for the USD/JPY today.

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