The Japanese yen has posted gains losses in the Thursday session. Currently, USD/JPY is trading at 113.60. On the release front, there are no economic events in Japan. BoJ Governor Haruhiko Kuroda will deliver remarks at an event in Tokyo. In the US, it’s another busy day, with three key events on the calendar – Building Permits, Philly Fed Manufacturing Index and Unemployment Claims.
The spotlight was on Fed chair Janet Yellen earlier this week, as she made her semi-annual appearance before Congress. In her testimony, Yellen was upbeat about the US economy. She noted that inflation is moving towards the Fed’s 2 percent target, the labor market remains red-hot and consumer spending is strong. Yellen has an enviable task – when is the appropriate time to raise rates in order to cool down the economy – in June or as early as March? A rate hike is a question of “when” rather than “if”, as Yellen warned that “waiting too long to remove accommodation would be unwise”. At the same time, the Fed needs to take into account the economic stance of the new administration, which remains unclear. President Trump has promised to outline a tax reform plan in a few weeks, but has left the Fed and the markets in the dark regarding economic policy. Unless the economy takes an unexpected turn downwards, it’s very likely that the Fed will press the rate trigger by June.
The Japanese economy has been improving, with real GDP coming in at 1 percent in 2016. The economy has recorded four consecutive quarters of growth and inflation continues to point upwards. However, the new administration of Donald Trump could be a major challenge for Japan. Trump has paraded the motto of “America first” and withdrew the US from the Trans-Pacific Partnership, a trade agreement in which Japan is a major partner. Trump has charged that Japan is manipulating its currency to gain an unfair trade advantage, and this disputed threatened to sour the recent meeting between Prime Minister Shinzo Abe and Trump in Washington. However, the two leaders agreed that their finance ministers would conduct bilateral talks to discuss currency policy. Abe has dodged a bullet for now, but if the yen falls below the 120 level, the war of words over exchange rates could be renewed. As well, Trump remains concerned about the huge US trade imbalance with Japan and will want to make changes in the US-Japan trade relationship. Japan is heavily dependent on its export sector, and any protectionist moves by the US, such as import taxes, could weaken the Japanese economy.
