USD/JPY has edged higher at the start of the week. In Monday’s North American session, the pair is trading at the 110 line. On the release front, Japanese Core Machinery Orders declined for the first time in three months, with a reading of -3.1%. This was much weaker than the forecast of +0.6%. Japanese PPI gained 2.1%, shy of the forecast of 2.2%. Later in the day, Japan releases BSI Manufacturing Index, with an estimate of 1.1 points. On Tuesday, Japan releases PPI, with the markets braced for a flat reading of 0.0%.
The Japanese economy has shown some improvement in the first quarter, but Final GDP was a major disappointment. First quarter GDP was revised downwards to 0.3%, compared to 0.5% in the preliminary GDP report. At the same time, the economy has posted growth for five consecutive quarters – the first time that has occurred in over 10 years. Japan has benefited from a stronger global economy, notably the manufacturing and export sectors. However, domestic consumption remains sluggish, and household spending contracted 1.4% on year in April. The Bank of Japan will hold a policy meeting on Thursday, and is expected to maintain its ultra-loose monetary stance in order to prop up inflation and domestic demand. Given that the economy has strengthened, policymakers may be looking to exit current policy, and analysts will be looking for nuances in BoJ language (in the rate statement or BoJ Governor Haruhiko Kuroda’s press conference) which could point to a more hawkish monetary stance. If the central bank does hint at a tighter policy, the yen could gain ground.
The Federal Reserve will meet on Wednesday, and the markets have priced in a rate hike, which would be the second increase in 2017. The likelihood continues to hover around the 90% level, so it would be a shock if the Fed did not make a move. However, an additional rate hike seems much less likely in the third quarter, with the CME forecasting the odds of a September move at just 26%. The markets are skeptical about another rate hike in the second half, unless the political situation in Washington shows signs of stabilizing. The Trump administration remains in damage control mode, as it’s difficult to assess the damage from the dramatic evidence of ex-FBI director James Comey. With dark clouds hovering above the White House, the Fed and the markets have serious concerns with regard to Trump’s ability to move forward with his economic agenda.
