Japanese Yen strengthened against the USD and the Euro last week. But the impact of Portuguese bank scare, BoJ stimulus program, and bond yields might weaken it.

The Japanese Yen strengthened against the USD and the Euro last week on rising military conflicts across Middle East and Ukraine, as well as Portuguese bank scare. However, this week, we will see little support from both for the Yen.

 

Temporary Scare

Previously, the main company of Portugal's biggest bank, Banco Espirito Santo, missed payments on some short-term bonds. The scare sent investors into panic as people are worried if it could prove to be contagious and trigger another debt crisis in the Eurozone. As the result, investors are selling off stocks and bonds, and seek safe haven instead.

Japanese
However, today (14/7) concern among investors on the potential risk of contagion has diminished significantly. Market panic decreased over time after investors are able to discern that the whole potential fallout is less than what people have thought it could be. Frances Coppola in Forbes briefly summarized, This is a Portuguese domestic disaster. How it is handled matters for Portugal, and for the principles of justice. But it doesn’t mean another Eurozone crisis. The concern further eased after Bank of Portugal said that the banks is well able to fulfill its capital requirements, which mean that there might be no need for bailout as there is no credit default on the horizon.

On the other hand, conflicts in Middle East and Ukraine remain, but with lower impact on the Yen than for Gold prices. Gaza is still under attack as Israeli forces refused to cease fire. Shootouts in Ukraine and Iraq too, is expected to persists as all involved parties have refused to sit on peace talks. Isolated incidents on the regions may influence the Yen if investors feel the need to balance up their risk portofolio. Nevertheless, there seem to be few needs for Yen compared to the Gold.

 

Bond's Play

While the Yen is still being seen as the safe haven currency, Japan assets are less so. Japan's historically low rate influence everything from borrowing rate to bond yields and derivatives. Consequently, investors are looking to sell Japanese bonds for better return from overseas. Yoshiyuki Suzuki from Fukoku Mutual Life Insurance Co. quoted by Bloomberg said, Japanese investors are looking for yield. The US 10-year absolute level is not very satisfying, but it’s attractive compared to Japanese government bonds.

US 10 Year Treasury Bond Yields traded on 2.53% last week after consistently falling lower in the previous days. It is 200 basis points higher than Japanese bond yields that was noted on 0.53%. Therefore, US Bond Yields is likely to go back up and supports USD bullish as the Portuguese bank scare has gone away and Japanese investors are looking for worthwhile investments. That is, of course, depends on how positive is the speculation around US economy would be.

The US this week is scheduled to publish several moderate to high impact reports, including retail sales , Producer Price Index (PPI), Building Permits, Jobless Claims, as well as manufacturing and consumer sentiment indexes. The most influential event, however, is The Fed governor, Janet Yellen, congressional testimony on Tuesday and Wednesday.

 

BoJ Stimulus Program

Little is expected from Japan economic data releases scheduled in the next few days. The Bank of Japan meeting that has started today and will end in a press conference tomorrow is estimated to hold policy in status quo. Although inflation rate in the region is steadily rises, economic recovery is still shaky due to the stalled exports. The Bank of Japan is expected to hold low rate and stimulus if for at least keeping the Yen on the low. Yen appreciation at these times could hurt Japan exports.

Akira

Japan's Economics Minister Akira Amari on talks with Reuters on Friday warned that premature exit from BOJ stimulus program may hurt economy recovery. Japan seemed to have gotten out from years of price declines, but it is not sustained yet, and Japan is still susceptible to external turmoils. Furthermore, Amari signalled the possibility of more easing to be channeled. The talk echoed BoJ governor previous talks. BoJ governor Haruhiko Kuroda on various occasions have implied their commitment to support the country recovery with more easing if needed.

In similar mindset, economists and analysts agreed. However, the realization of further easing will need more time and is not likely to be announced this week. In such circumstances, Kuroda speech on the heels of BoJ meeting most likely will not drive any significant response from the Yen, unless there is more dovish or hawkish-sounding comments from the governor. The Yen is predicted to stay on its previous trading ranges against the USD and the Euro this week.