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Japanese Yen Weakens As Investors Easing BOJ to Prevent Recession

September 4, 2019 at 16:39 by Andrew Moran

Watermark on the Japanese yen billThe Japanese yen is weakening midweek as new economic data is exacerbating recession fears. With some central bankers suggesting pre-emptive stimulus to prevent a contraction, investors are paying attention and think the world’s third-largest economy is heading for a steep contraction, even with a new trade agreement with the US later this month

It looks like the US is not the only major economy to experience a downward trend in manufacturing. The Jibun Bank Japan Manufacturing Purchasing Managers’ Index (PMI) was revised to 49.3 in August, down from the flash figure of 49.5. It is also below July’s 49.4.

Manufacturing output slumped at a slower rate while new orders declined to a five-month low. Japanese firms are contending with a myriad of issues, from tougher trade conditions in foreign markets to reduced purchasing activity to trade tensions with South Korea. The only positive component of the index was employment.

Jibun Bank’s composite and services PMI rose to 51.9 and 53.3 in August, respectively.

Meanwhile, capital expenditures in the second quarter were the lowest since the same time period in 2017. According to the Ministry of Finances, companies boosted spending on equipment and facilities by just 1.9% year-on-year in the April-to-June period.

In a speech to business leaders in northern Japan on Wednesday, Bank of Japan (BOJ) board member Goushi Kataoka endorsed pre-emptive easing of monetary policy. Concerned about low growth and low inflation, Kataoka stated that the BOJ needs to intervene to prevent a stronger yen weighing on imports.

When there is a distance between our price target and actual inflation, it’s important to respond pre-emptively instead of waiting until we confirm that the price trend has changed.

At present, there is a gap between our inflation target and actual price moves. As such, it’s necessary to strengthen monetary easing.

Many economists have predicted that the BOJ would ease, particularly after the central bank signaled that it would stimulate in the event of risks undermining the economy.

BOJ board member Hitoshi Suzuki did say that he does not anticipate a recession, though he urged everyone to monitor the impact of the upcoming national sales tax hike.

The USD/JPY currency pair jumped 0.33% to 106.29, from an opening of 105.94, at 16:29 GMT on Wednesday. The EUR/JPY soared 0.85% to 117.23, from an opening of 116.26.

If you have any questions, comments, or opinions regarding the Japanese Yen, feel free to post them using the commentary form below.

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