Interesting new economic numbers were released in Japan. Key Consumer Price Index fell at a brisk pace in May, according to the government data. The core nationwide CPI, which excludes volatile fresh food prices, fell 1.1 percent from the previous year. This makes it a third straight month of decline. What makes it special is that is sets a new record for the biggest fall since the government began releasing comparable data in 1971. This is important, because in Japan deflation is nothing new, they have been fighting it on and off over last 2 decades. Record setting pace of this process, however, is being noticed.
Deflation is expected to hamper growth by depressing company profits and making consumers to postpone purchases, causing production slowdowns and wage cuts. It can also increase public debt, with government collecting less revenue. Japan’s finance minister Kaoru Yosano expressed concerns about a significant drop in demand. And the outlook is not good. Japan’s Central Bank predicts that prices will keep falling for at least two years. In its latest economic outlook report in May, it forecast core CPI to drop 1.5 percent this fiscal year ending March 2010 and another 1 percent the following year.
Many economists have been warning about possibility of world wide deflation followed by severe inflation over next few years. We will have to wait and see if other countries show similar trends. In the meantime, Japanese government will probably try to stimulate economic recovery. They don’t have many more options available, with rates next to 0%, and pile of debt bigger than mount Fuji. Here is one scenario, intriguing from the point of view of Forex trader- direct currency intervention. If they could get Yen soft enough to make Japanese exports cheap, domestic economy could snap from the slumber. Maybe.
Over time JPY is bound to get weaker against most currencies, and it already has. However yen is still relatively strong in relation to the US Dollar, at 95 as of this writing. This is well below important 100 level. I wouldn’t be at all surprised if BoJ follows example of Swiss National Bank, which is not shy about trying to weaken the Franc. Helping national economy is their motivation. Hmm, if they succeed and indeed manage to push respective currencies down (just a thought), will the speculators eventually jump on board in the form of carry trade? Even right now there is no shortage of “gurus” selling carry trade “systems”. This whole cycle would repeat itself, keeping me busy for years to come. Just one of many potential outcomes.
This extended diatribe is indicative of my day- boring. Took very few trades and they were of small size. Trades covered in this blog, yesterday, didn’t happen.
NZD-JPY moved up a little bit, but not very convincingly. For the time being I leave my sell order intact at 60.90. Over the weekend I’ll go over the charts and decide what to do next. The other order, sell in EUR-CAD will almost certainly be moved higher, also after the weekend.
This has been a relatively flat week for me. A lot of trades didn’t happen. However, the few orders that were filled ended up in positive territory and that’s what counts.
Mike K.
Pile of debt bigger than mount Fuji? I had a good laugh when reading it.
Bank of Japan seems out of options. They can’t get the economy going and now possibility of deflation. Once again. Intervention is a possibility I have not though about. BTW, do you think SNB is done selling Franc?
After one of the earlier interventions they suggested 1.5000 EUR-CHF to be the key. Now they don’t want to say anything. I don’t think they are done. In my mind intervening should last long enough untill market starts moving in the desired direction on its own. If their objective is to create lasting weakness to CHF, than more selling of it is ahead.
I understand you are going on vacation. When do you leave? I mean, what day are going to write your last post?
BOJ trying to push yen lower is not that outlendish at all. As you pointed out, they are about out of options. Short of world wide economic rebound, not much else left to do. At the very least they might try to test the “strong dollar policy” of US, by moving usd-jpy ro above 100, just as you suggested.
Jason, last post will be made either Thursday or Friday.
Where are you going?
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Andy, south of Europe
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