Yen Continues To Fall, Signaling the End of a Corrective Rally

With markets back in risk-on mode, the yen fell sharply overnight and continues to be under pressure in the Asian session. The NASDAQ closed at a fresh all-time high, while the Dow and S&P 500 also rose. Hong Kong’s major Asian indexes follow with substantial increases. The dollar’s decline has continued this week, but losses have been limited so far. In the meantime, commodity currencies are also continuing their comeback.

Japan’s manufacturing PMI fell to 51.5 in June from 53.0 in May. Manufacturing output fell to 49.1 from 53.7 for the first time since January. Services PMI rose marginally to 47.2 from 46.5. The PMI Composite fell to 47.8 from 48.8.

Osama Bhatti, an economist at IHS Markit, said: “Japanese private sector activity remained in recession … members of panel generally attributed the breach of working conditions to continued COVID-19 restrictions coupled with severe supply chain pressure, especially for manufacturers.

“However, one striking note was that private sector firms in Japan continued to increase employment despite low demand conditions … Despite the continued constraints of the Japanese economy due to the pandemic, private sector firms were optimistic about improving business conditions in the coming year, and to a greater extent than in May.”

The Bank of Japan May Retain Its Lenient Policies and a Weak Yen

The latest inflation data from Japan continues to point to deflationary pressures; that the Bank of Japan will maintain its adaptive monetary policy, consisting of quantitative easing, negative discount rate, and targeting 0% yield.

The rise in global inflation should continue to be positive for Japan. The gear is higher external rates and widening spreads, which weaken the yen and help increase the competitiveness of Japanese exports. Japanese stocks have historically performed well amid a weak yen.

While the world is working towards normalizing post-covid, the rise in global rates and inflation should occur gradually as the global recovery intensifies. Investment opportunities brought about by demographic change, climate change and technological shifts must return to the spotlight as they are long-term and long-term and will be less susceptible to negative cyclical factors.