Safe havens had strengthened across the board as risk events over the past month have lifted markets’ risk off sentiment. Notably; the London terror attack, UK general election, Trump’s Russia leak scandal and the gulf states cutting diplomatic ties with Qatar. JPY has been one of the best performing currencies over the past month. JPY has strengthened substantially by 4.2% against USD from May 11th to June 6th. USD/JPY has retraced from the psychological resistance level at 114.00 since May 11th, hitting a low of 109.10 on June 7th, last seen on April 21st. However, safe havens have retreated after the release of the UK general election outcome easing markets’ risk-off sentiment. USD/JPY saw a 0.6% rebound from June 7th to 13th. Japan’s economy has seen a sound recovery this year helped by improved export conditions, increased industrial production, growing corporate profits and capex.
Annualized Japanese Q1 GDP second reading was revised downward substantially to 1% from the first reading of 2.2%. Some government officials alleged that it was caused by a one-off adjustment in oil inventories instead of an economic slowdown. The Job market has tightened but wage growth and household spending remain sluggish.
Year-On-Year Japanese consumer prices have returned to positive territory since January 2017; fluctuating in a range between 0.2% to 0.4% over the past five months. However, the core inflation rate remains sluggish; fluctuating in a range between -0.1% to 0.1% over the past three months. At present inflation is still far below the central bank’s 2% target and it is likely to stay soft for an extended period due to stagnant wage growth and household spending.
The markets are keeping a close eye on when the Bank of Japan (BoJ) will begin to gradually remove its quantitative easing programme. Although the economy has seen a moderate recovery (as inflation hasn’t seen a stable upswing) the BoJ will likely keep rates in negative territory and continue the QE until it sees a sustainable pickup in inflation. The regional tensions in the middle east, US political turmoil and the upcoming German election in September are likely to continue to provide JPY support over the following months. If the Japanese Q2 GDP, and incoming economic data outperforms, it will likely further strengthen JPY.