USD/JPY has posted considerable losses in the Tuesday session. In North American trade, the pair is trading at 108.86, down 0.76% on the day. On the release front, US Factory Orders in July declined 3.3%, matching the estimate. Still, the tumble marked the sharpest decline since August 2014. As well, three Federal Reserve FOMC members are speaking during the day – Lael Brainard, Neel Kashkari and Neel Kashkari. The sole Japanese event is Average Cash Earnings, which is expected to rebound 0.5%. On Wednesday, the US releases ISM Non-Manufacturing PMI, with an estimate of 55.5 points.
The yen continues to show volatility due to the ongoing North Korean crisis, as the safe-haven asset has been in demand following hostile moves by North Korea. This was again the situation on Monday, as the yen briefly improved following North Korea’s announcement that it had exploded a hydrogen bomb which could be fitted to an intercontinental ballistic missile. Although the claim has yet to be verified by Western analysts, it is clear that this nuclear device test has ratcheted tensions between North Korea and the US, Japan and South Korea. The International Atomic Energy Authority responded by labeling North Korea as a ‘global threat’, and US President Trump announced on Tuesday that he would increase weapon sales to Japan and South Korea. As tensions between Washington and Pyongyang have increased, the drop in risk appetite is driving investors to the safe-haven yen. If the crisis in the Korean peninsula continues, traders can expect the Japanese currency to continue to gain ground.
Is the Bank of Japan fighting an unwinnable battle? BoJ Governor Haruhiko Kuroda has insisted that he will not alter monetary policy until inflation hits the bank’s level of 2%, but critics are becoming increasingly impatient, noting that years of ultra-accommodative policy have failed to free the economy from the shackles of disinflation. On Monday, former BoJ board member Takahide Kiuchi said the BoJ must make changes to its radical stimulus. Kiuchi called on the central bank to be more flexible with its inflation target, and also warned that the bank needed to taper its annual asset purchases to 45 JPY trillion, otherwise the current purchases of JPY 60 trillion would hit the ceiling in mid-2018. Critics of the BoJ’s stimulus experiment have long warned that the BoJ is running out of ammunition in its monetary policy arsenal, and have said that the BoJ must bite the bullet sooner or later and wind down its stimulus program.
