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Japanese Yen (JPY) Exchange Rate Forecast: Waning Geopolitical Risk may Cause Declination

Japanese Yen

The early part of this week had seen a positive surge in the strength of the Yen. This was fuelled by increased demand for the Yen’s safe haven qualities in light of mounting geopolitical tension.

However, many of the Japanese domestic data releases this week were less-than-impressive which held back a healthy surge against most of the majors. The Japanese Yen did see a large gain against the Pound; but this was not unique in that almost every currency experienced gains against the bearish Sterling this week.

On Monday Japanese consumer confidence gained moderately from 41.1 to 41.5, although this is still below the desired 50+ mark.

Tuesday saw a retraction in year-on-year industrial production from 3.2% to 3.1%.

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Despite having gained fractionally from forecast figures, Wednesday’s Japanese Gross Domestic Product (GDP) data didn’t make for ideal reading. Quarter-on-quarter GDP fell from 1.5% to -1.7%. Also the annualized GDP saw a second quarter decline from 6.1% to -6.8%.

Thursday’s year-on-year machine orders gained from -14.3% to -3.0% but were forecast to hit 3.0%.

The general bad performance of the Japanese domestic data over the week had less of an impact than it ordinarily would have due to the ongoing geopolitical tensions. As investors trended towards risk aversion, the safe haven qualities of the Yen somewhat micrified the unimpressive domestic data.

 Forecast for the Japanese Yen exchange rate

As this week draws to a close the effect of a set of disappointing domestic data results has become more influential as tensions between Russia and Ukraine has a less dominant influence on traders. Alvin Tan, a currency strategist at Societe Generale SA in London, stated; ‘There’s some pullback in geopolitical tensions, particularly in Ukraine [...] Combined with that is the realization by the market that major central banks will continue to provide liquidity support’.

As a result of waning geopolitical tension the Yen fell by 0.2% against the ‘Greenback’ (USD) this morning. The Yen has also weakened against the Euro this week by around 0.5%.

In the coming week there will be several Japanese domestic data releases of varying importance. Ones to watch are; Adjusted Merchandise Trade Balance and Total Merchandise Trade Balance, All Industry Activity Index, Buying Foreign Stocks and Buying Foreign Bonds.

Perhaps the most important domestic data release, in terms of economic weighting and Yen movement, will be Thursday’s Markit/JMMA Manufacturing PMI. There is no forecast figure at this time, but investors in the yen will hope for an improvement on the previous figure of 50.5.

If geopolitical situations begin, or continue, to fizzle out expect the Japanese Yen to slide as a consequence; unless the domestic data proves to be much stronger than anticipated. Conversely if the geopolitical tensions mount expect the Yen to strengthen and domestic data releases to have less significance.

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