USD/JPY has jumped higher in Tuesday’s North America session. In North American trade, the pair is trading at 110.78, up 1.04% on the day. On the release front, Japanese Revised Industrial Production rebounded with a strong gain of 2.2%, beating the forecast of 1.6%. In the US, Retail Sales came in at 0.6%, above the estimate of 0.4%. Core Retail Sales also looked sharp, with the gain of 0.5% beating the forecast of 0.3%. There was more good news from the manufacturing sector, as the Empire State Manufacturing Index soared to 25.2, crushing the estimate of 10.1 points. On Wednesday, the US releases Building Permits and Housing Starts. As well, the FOMC publishes its minutes from the July FOMC meeting.
The yen posted strong gains last week, as the saber-rattling between the US and North Korea reached a fever pitch. North Korea threatened to fire missiles at Guam, and President Trump warned of severe consequences in response. The safe-haven yen gained 1.3% last week, but the dollar has regained these losses, as a reduction in the rhetoric between Washington and Pyongyang has increased risk appetite on the part of investors. Still, tensions remain high in the Korean peninsula, and if either side ratchets up the rhetoric, the markets could again get jittery and the yen could gain ground.
The Japanese economy has shown signs of improvement, and this was underscored as Preliminary GDP in Q2. Japan has now posted a sixth consecutive of growth, marking the longest expansion in over a decade. Although exports have declined, domestic demand has rebounded. With a tight labor market and the business sector confident about economic conditions, better times could continue in 2017. The fly in the ointment remains inflation, as BoJ’s ultra-easy monetary policy has failed to eliminate the threat of deflation. The BoJ has insisted that it will not tighten policy before inflation climbs closer to the bank’s inflation target of 2%, but clearly this goal is unrealistic in the short term, and the BoJ may have to lower its inflation target.
