The Japanese yen is trading sideways on Thursday, after losing ground on Wednesday. In the North American session, USD/JPY is trading at 110.27, down 0.08% on the day. On the release front, Japanese Preliminary GDP contracted 0.2%, missing the estimate of 0.0%. Japanese Industrial Production dropped to 1.4%, above the estimate of 1.2%. In the US, construction numbers were mixed. Building Permits remained steady at 1.35 million, matching the forecast. Housing Starts dropped to 1.29 million, short of the estimate of 1.32 million. Later in the day, Japan releases Japanese Core Machinery Orders, with the markets braced for a sharp decline of 2.9%. On Thursday, the U.S releases Philly Fed Manufacturing Index and unemployment claims. Japan will publish National Core CPI.
In the U.S, retail sales and core retail sales posted gains in April, although both indicators fell short of the estimates. Still, consumer spending is improving after a sluggish first quarter. Investors liked what they saw, and the US dollar was broadly higher on Tuesday. At the same time, a new concern is higher gas prices, which could put a dent in consumers’ wallets and hurt spending. Oil prices have hit their highest levels in over 3 years, and with the US leaving the Iran nuclear deal and escalating tensions in the Middle East, gasoline prices could remain at high levels.
The Bank of Japan, always a cautious player, will not be exiting from its exiting from its radical stimulus anytime soon. However, BoJ policymakers are looking to raise bond yields as part of normalizing policy. Any moves will be small and incremental in nature, in order not to rattle the markets or the yen exchange rate. The bank took one such step in April, when it removed a deadline for hitting its inflation target of around 2 percent. The stimulus program was introduced in 2013, when BoJ Governor Kuroda claimed that he would reach the inflation target within two years. Fast forward to 2018, and the inflation target remains elusive, despite trillions of yen in stimulus. A stronger Japanese economy will make it easier for the BoJ to depart its radical easing policy, but traders should be prepared for small, incremental steps towards this end.