Lately, there were lots of talks about more QE in Japan, in order to stimulate the economy which could be impacted in the coming months by the sales tax increase that occurred on April 1st. If we summarise the economic data in the past few weeks, we saw a huge decline in April retail sales (-13.7% MoM, the largest decline on record), a decreasing Manufacturing PMI which now stands below the 50-recession level (49.4), a shrinking current account that recorded a ‘tiny’ surplus of ¥789.9bn in 2013 compare to ¥4.2tr in FY2012, a lower-than-expected Industrial Production (Prelim IP came in at -2.5% in April vs. 2.0%) and household spending that shrank 4.6%. It is clear that Japan is beginning to show the impact of the tax increase. And even though Q1 GDP expanded by 5.9% (annualized), the economy is expected to contract by 3% in the second quarter according to economists. In their last meeting (May 11), Bank of Japan policymakers warned that exports may remain weak in the near future due to sluggish demand from Asian countries.
However, an adjustment of the monetary policy at the moment remains tricky based on the last inflation data update. As expected, the institution of this consumption tax pushed inflation to 3.2% (Core Nationwide YoY) in April from 1.3% the previous month, well above the central bank’s 2-percent target.
Focus on USDJPY:
As the market expectations of new stimulus by the BoJ are being reconsidered, we are wondering if we could see a pause in USDJPY (or a sort of cap above the 103.00 level) in the medium term. Moreover, we need a turn in US yields (with higher vols in Treasuries), which have entered into a bearish momentum since the beginning of April. The 10-year yield decreased from 2.81% on April 2nd to 2.40% on May 28th and is now trading slightly above 2.52%. The sharp correction in the Nikkei (-9.4% YtD to May 31st) has also been one of the forces underpinning the yen.
USDJPY is now trading around its 100-day SMA (102.35), and the next resistance stands at 103.00 (April 5th high). However, with technical indicators showing neutral signals, it feels like the positive trend we have seen in the last couple of weeks is about to end (lower low between now and 103.00).