Fundamental Forecast for Yen:Bearish
• End of Japanese fiscal year introduces pain in Yen trading markets
• Disappointing Bank of Japan Tankan survey results hurts domestic markets
• Why do most FX traders lose money? This is the number one mistake we see
The Japanese Yen finished the week higher versus the fast-falling US Dollar, but key disappointments in domestic economic data and Nikkei 225 losses kept the JPY lower against other major FX counterparts.
Historically we have seen the Yen strengthen (USD/JPY weaken) on domestic equity market sell-offs. And yet this time is different for a key reason—both the Yen and the Nikkei stand to lose if the domestic economy continues to underperform. A sell-off in Japanese stocks into the fiscal year-end (March 31) left the Nikkei in negative territory for fiscal year 2015—the first such annual loss in three years. Profit warnings and disappointing Bank of Japan Tankan survey result forced further sell-offs on April 1, and current price momentum and broader sentiment favors further Japanese equity weakness.
The Yen could nonetheless continue to weaken alongside stocks for one simple reason—economic underperformance will encourage the Bank of Japan to cut interest rates further into negative territory. Indeed, the BoJ sent shockwaves throughout global markets as it surprised most and cut its benchmark overnight rate to -0.10% at its January meeting. Domestic rates subsequently plummeted, and Japanese Government Bond yields are now negative for bonds maturing in under 10 years. Holding funds in Japanese Yen is an expensive proposition if you’re required to pay the government for lending it money.