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FOREX watch: Investors eye BoJ meeting minutes

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FOREX watch: Investors eye BoJ meeting minutes

One of the biggest stories in the world of finance has been the Japanese economy, which is battling decades-long deflation, sluggish growth and one of the world’s most volatile bond markets. On Wednesday Japan will once again be the centre of global trade, as the Bank of Japan is set to publish the minutes from its June 10-11 monetary policy meetings. Last month’s interest rate decision was accompanied by upbeat remarks from the BoJ concerning the status of economic recovery. In particular, the BoJ was confident that positive movements in economic activity could be gleaned by the rising inflation rate, one of the chief objectives of Japan’s monetary easing.

Tokyo Core CPI, one of Japan’s most important inflation indicators, rose above zero last month, and was perhaps the first tangible proof to investors that Japan’s shock therapy was bearing some fruit. On Wednesday investors will have a chance to examine in greater depth the reasons behind the BoJ’s latest policy decision, as well as key economic developments inside and outside of Japan that policymakers are concerned about.

Yen pairs have been highly volatile in the lead-up to the minutes. The USDJPY hit a session high of 100.32 in European trade on the back of weak China GDP and industrial production data, which cast doubt over Asia’s economic growth prospects.  However, the pair later tumbled in North American trade, closing at 99.1382 (a loss of more than 0.7 percent). The EURJPY experienced strong fluctuations Tuesday, trading within a range of 130.0357 and 130.8190 before consolidating at 130.4300.

The outlook on the Japanese economy is mixed, and traders aren’t encouraged to make big bets on the yen, which is expected to face considerable debasement as the BoJ pursues aggressive economic expansion. However, recent inflation indicators show that changes in year-over-year CPI are likely to turn to positive. Recovery is expected to be moderate, but will depend heavily on the resurgence of several overseas economies.

Downside risks are too many to name, but include Japan’s highly volatile bond market, sluggish growth in the domestic economy, the European debt problem and deepening US recovery.

Yen traders making short bets may find ways to beat the market in the short-term, but the long-term trends aren’t favourable. A dovish reading of the minutes on Wednesday is likely to spur further volatility for one of 2013’s most oversold currencies.

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