Japanese Yen May Fall Further on Broken Risk Link, Disappointing Data

At the start of this past week, many were wondering if the Japanese yen had lost its safe-haven status, as the currency pulled back sharply despite broad declines in the stock markets.

Japanese Yen May Fall Further on Broken Risk Link, Disappointing Data

Fundamental Outlook for Japanese Yen: Bearish

- Japanese trade data shows that exports fell by a record 45.7 percent in January
- Japanese economy continues to deteriorate rapidly as industrial output, household spending fall sharply
- Japanese Yen - Losing Its Safe Haven Status?

At the start of this past week, many were wondering if the Japanese yen had lost its safe-haven status, as the currency pulled back sharply despite broad declines in the stock markets. While the tide turned on Thursday night as the Japanese yen started to recoup some of its losses, the currency still ended the week down quite a bit: -4.6 percent versus the US dollar, -3.77 percent against the British pound, and -3.5 percent against the euro and Swiss franc. This certainly leaves us with a cautious stance on the Japanese yen since its correlation with risk trends may still be falling apart, and as a result, those looking for a more reliable correlation should look toward the US dollar, as it was easily the biggest gainer in a week that saw steady declines in the S&P 500 to the lowest levels since December 1996.

Looking ahead, there will only be a few economic indicators released that will be worth noting. On March 1, Japanese labor cash earnings are forecasted to remain exceptionally low at -1.2 percent in January from a year earlier, marking the third straight month of negative results. Japanese consumption has been very low for a long time, as there was little to no wage growth to provide for an increase in discretionary income. When you consider that labor earnings have recently been steadily declining, it becomes clear that there is almost no impetus for households to spend and support the economy.

On March 4, Japanese capital spending (excluding software) is projected to fall for the seventh straight quarter in Q4, as the annual rate may plunge by the most in 11 years at a rate of 17.0 percent. Businesses, which depended heavily upon robust foreign demand, have had to come to terms with the impact of the appreciation of the Japanese yen and the global economic slowdown/recession, as the latest figures from January show that exports fell 45.7 percent from a year earlier. With the Japanese government and economists all of the world forecasting that global growth will time quite some time to recover, businesses have no reason to invest in their operations and if anything, they are looking to cut away any and all excess fat. Overall, readings in line with expectations will signal what many already anticipate: that the Japanese recession will only deepen during the first half of 2009. – TB