USD/JPY – Better-than-expected US employment fuels rally ahead of FOMC

on Jul 31, 2013

**, Wednesday 31 July:** The USD/JPY continued its downward trend in today’s Asian trading after Japan’s PMI for July came out as 50.7, well down on June’s 52.3 and only just in expansion territory.

Industrial Production in June, published yesterday, fell the most since the March 2011 East Japan Earthquake. Weakening production undermines Prime Minister Abe’s calls for higher wages in the private sector to bolster his reflation efforts beyond the temporary boosts provided by fiscal stimulus.
Japan’s Housing Starts for June was today reported at 15.3 percent, falling short of analysts’ estimates for 16 percent.

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Labour Cash Earnings for June matched the expected 0.1 percent growth, but the May figure was revised down from flat to a 0.1 percent decline.
Economists fear that Japan’s aging population and unique wage curve pose the risk of more or ongoing deflationary pressure. Salaries historically peak as a workers turns 50 and wages have been in a downward spiral since 1996.

Longer term the country’s population pyramid is on track to be the complete inverse of how it looked in the 1960s.
Monetary and fiscal policy can raise prices to a certain extent, but for a sustainable inflation target of around two percent Japan needs to build an economy capable of higher nominal wages. With a growing proportion of the workforce approaching 50, necessary labour market reform and structural change in the economy are assuming growing urgency.

The USD/JPY has been consolidating in the European session, with a one hour 90-pip spike up to 98.5 right after the release of a better-than-expected ADP US Employment Change for July. As reported, some 200,000 jobs have been added in the private sector, well up on expectations for 180,000 and also bettering June’s upwardly (by 10,000) revised 198,000.

Also in the US today, the GDP Price Index for the second quarter came out as up 0.7 percent q/q, below market expectations for 1.1 percent growth. Real US GDP q/q was higher than expected with 1.7 growth.
The last word for the pair today will come from the FOMC Interest Rate Decision and Announcement from 19.00 BST. Expectations are for the Fed to leave the target cash rate unchanged at 0 to 0.25 percent. Traders will be listening intently for any forward guidance and to every nuance which might impact on the prospects of early QE tapering.


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