- EUR/JPY edges lower to 157.20 in Wednesday’s early European session, down 0.72% on the day.
- Japan’s trade balance shrank less than expected in August, but Imports and Exports were worse than estimated.
- Market players will keep an eye on the Eurozone HICP inflation data on Wednesday.
The EUR/JPY cross weakens near 157.20, snapping to a two-day winning streak during the early European session on Wednesday. The Japanese weaker Imports and Exports reading raises some doubts over demand in Japan on the back of strong wages, which weighs on the Japanese Yen (JPY). The Bank of Japan (BoJ) interest rate decision on Friday will be closely watched.
Japan’s Trade Balance shrank less than expected in August, although Imports and Exports missed estimations. Japan’s trade deficit widens to 695.3 billion yen in August from 628.7 billion yen in July, better than expectations for a deficit of 1.38 trillion yen. Meanwhile, Exports grew 5.6% YoY in August versus 10.2% prior, weaker than the 10.0% expected. Imports rose 2.3% in the same period from a 16.6% jump in July, below the consensus of a 13.4% rise.
Economists from the Reuters poll expect the BoJ to leave the interest rate unchanged on Friday, but will likely raise interest rates again before the year ends. BoJ Governor Kazuo Ueda said that the central bank will continue to raise rates if the economy moves in line with its forecasts. BoJ policymaker Naoki Tamura stated on Thursday that the central bank should raise interest rates to at least 1% as early as the second half of the next fiscal year. The hawkish stance from the Japanese central bank might lift the JPY and create a headwind for EUR/JPY in the near term.
On the Euro front, the Eurozone Harmonized Index of Consumer Prices (HICP) data is due on Wednesday. The headline HICP is projected to show an increase of 2.2% YoY in August, while the core HICP is forecasted to show a rise of 2.8% in the same period. If the inflation data shows a hotter than expected outcome, this could cap the downside for the shared currency.
(This story was corrected on September 18 at 08:41 GMT to say that the Bank of Japan's acronym is BoJ, not BoC.)
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.
The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.
A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. With wage inflation becoming a cause of concern, the BoJ looks to move away from ultra loose policy, while trying to avoid slowing the activity too much.
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