The Japanese yen has posted losses on Friday, continuing the upward movement which marked the Thursday session. Currently, USD/JPY is trading at 112.80. The week wraps up on a quiet note. There are no Japanese events on Friday, and the sole US indicator is CB Leading Index, with an estimate of 0.5%.
Federal Reserve Chair Janet Yellen is in the enviable position of having to decide how the Fed should respond to a strong US economy. Earlier this week, she made her semi-annual appearance before Congress. In her testimony, Yellen was upbeat about the 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. A rate hike appears to be just a question of time, as Yellen warned that “waiting too long to remove accommodation would be unwise”. If the US economy stays on track in 2017, analysts expect two or three small rate hikes. 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. Barring an unexpected tailspin from the economy, the Fed is likely to raise rates in the first half of 2017.
The Japanese economy is showing improvement, with real GDP expanding one percent in 2016. The economy has recorded four consecutive quarters of growth and inflation continues to point upwards, although it remains well below the BoJ target of two percent. At the same time, the new Trump administration could pose a serious 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 potential crisis was quickly defused, as 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 USD/JPY pushes above 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 hurt the Japanese economy.