It continues to be an uneventful week for the Japanese yen. In Wednesday’s North American session, USD/JPY is trading at 110.75, up 0.30% on the day. On the release front, Japanese Core Machinery Orders posted a strong gain of 5.7%, well above the estimate of -1.1%. Industrial Production accelerated to 0.9%, crushing the estimate of 0.4%. Later in the day, Japan releases Industrial Production, which is expected to edge up to 0.6%. In the US, manufacturing numbers looked sharp. Capacity Utilization improved to 77.9%, beating the estimate of 77.3%. This marked the highest level since July 2014.
Japan’s economy continues to gains steam, buoyed by a strong export sector and increased consumer spending. The positive trend has elicited bullish comments from the cautious Bank of Japan. On Monday, BoJ Governor Haruhiko Kuroda sounded optimistic about the economy and inflation, and the Japanese yen responded by climbing to a 4-month high. Kuroda said that core CPI had improved to about 1 percent, and said that the BoJ expected the economy to "continue expanding moderately". This was a much more favorable prognosis compared to October 2016, when Kuroda stated that inflation was around zero. Although Kuroda reiterated that the BoJ will maintain its massive stimulus program, a stronger Japanese economy has raised speculation that the Bank could follow the ECB and reduce its asset purchase program, which would likely strengthen the Japanese yen. The BoJ’s quarterly report was also optimistic about inflation, stating that stronger growth would raise inflation closer to the BoJ’s target of around 2 percent.
The markets are keeping one eye on the Federal Reserve, which holds its next policy meeting on January 31. A rate hike is a virtual certainty, with CME Fed Watch pegging the odds of a quarter-point hike at 98.5%. Although this means that a rate hike has been priced in by the markets, the dollar could nevertheless gain ground after a hike, as a rate increase would signify an important vote of confidence in the economy by the Fed Reserve. If the US economy continues to expand at a clip of around 3 percent, there is a strong likelihood of another rate hike in the first half of 2018.
