Sun about to rise for Japan and the yen

Lisa Smith, BA (Hons), CeFA

The Japanese Yen is holding up well after the Bank of Japan left interest rates and quantitative easing unchanged for another month.

Markets feared increasing the asset purchase program would undermine the fragile yen, considered overvalued by many currency and forex traders.

The bank pleased the markets by hinting that economic growth was progressing slightly ahead of expectations.

Poor weather in Thailand also delivered a sucker punch to growth last year, disrupting supplies of raw materials and components to manufacturers.

Nevertheless, policy makers confirmed Japan is on track to hit the 1% inflation target.

GDP is improving at a rate of 4.7% – 0.6% ahead of May’s figures. Japanese exports are still priced too high to give the government much comfort due to the strength of the yen, especially against the US dollar.

Meanwhile, spending on construction following last year’s tsunami and earthquakes is fuelling Japan’s economic resurgence.

Spending on public building projects leapt by 5.6% in March, compared with 4% in February.

Orders to the leading 50 firms surged by more than 16% in April, following a drop of 0.3% in March, while the foundations were laid for 73,647 new homes, an increase of 10% from a year ago.

Unlike pre-recession housing booms in the USA and Europe, the building is demand led following destruction of property and not speculative development.

Despite positive economic indicators, Japan and the yen may still suffer from the fall out of the eurozone crisis because the European Union is a major trading partner.

Financial services conglomerate Nomura predicts the fall in Japanese stocks is bottoming out and ready for a rise.

Nomura analysts said the trend in trading “now marks an appropriate point for the current downtrend to come to an end.”

“We see signs of bottoming out among high-beta sectors such as financials & real estate and some export sectors,” said a spokesman. “We view this as an indicator that the decline in Japanese equities is finishing.”

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