USD/JPY is showing limited movement in the Monday session. In North American trade, USD/JPY is trading at 113.49, down 0.03% on the day. On the release front, Japanese PPI jumped to 3.4%, above the forecast of 3.1%. There are no major indicators out of Japan or the US. Bank of Japan Governor Haruhiko Kuroda will speak at an event in Zurich. On Tuesday, Kuroda and Federal Reserve Chair Janet Yellen will participate in a panel at an ECB event in Frankfurt. As well, the US will release PPI and Core PPI reports.
As Prime Minister Shinzo Abe begins a new term in office, he can point to his economic platform as being partially successful. The ‘Abenomics’ program is based on three prongs – ultra-loose monetary easing, fiscal spending and structural reforms to the economy. The program has been in place since 2012, and the economy is finally on its feet, as GDP continues to expand. However, inflation remains stubbornly low, and a strong labor market has not led to higher wages,which would help boost inflation. Companies continue to look for ways to spend their cash, such as buying foreign companies, but are reluctant to plow more funds into wages. Business confidence in the economy remains lukewarm, and businesses are reluctant to add to their fixed costs. The BoJ has urged companies to increase wages, but this is unlikely to occur until the business sector is convinced that the current economic rebound will be long-lasting.
The Bank of Japan has faced criticism over its ultra-accommodative stimulus program, but received support from the IMF last week. The IMF stated that the BoJ should maintain the program in order to boost inflation, which remains at low levels, despite a stronger Japanese economy. Critics have argued that the massive stimulus has distorted markets, such as a 26-year high for the Tokyo stock market. However, the BoJ has consistently said that it will not taper the program until inflation moves closer to the Bank’s 2 percent target. This stance puts the BoJ at odds with the Federal Reserve and the ECB, which are looking to reduce stimulus. However, the IMF noted that this divergence had not caused any significant capital outflows out of Asia, since the Fed and ECB had clearly communicated to the markets their shift in policy.
