Japanese yen dips as mfg. outlook

The Japanese yen has started the trading week with losses, as the dollar has pushed closer to the 114 level. In the European session, USD/JPY is trading at 113.69, up 0.32% on the day.

Manufacturing outlook is grim

Japan’s economy received a mixed report on Monday from the well-respected Tankan indices for Q3. The Manufacturing Index stalled at 18, shy of the consensus of 19 points. Large firms are pessimistic about the outlook for manufacturing. There are expectations that raw material costs will rise due to higher energy costs and the weak Japanese yen. Add to this an already difficult situation with supply shortages, and the outlook for the manufacturing sector does not look good.

The situation looks brighter for the non-manufacturing sector, which accelerated for a sixth straight quarter. The Q3 reading of 9 was up sharply from 2 in Q2 and beat the forecast of 6 points. This was the highest level since December 2019, the last release before the Covid pandemic.

It should be noted that the Tankan readings are based on surveys which may not have included the recent spread of Omicron, which means that the readings would have been weaker. As we head into the New Year, the outlook for Japan’s economy is not all that promising, especially with the uncertainty over Omicron. The Kishida government is expected to maintain, and possibly increase, its huge fiscal and monetary support programmes, but it’s questionable, based on past performance, if these measures will be effective at kick-starting the weak economy.

This week’s highlight is the FOMC policy meeting on Wednesday. There is a strong chance that the Fed will announce it is doubling the pace of its taper, to US 30 billion dollars/mth. This could provide a boost for the dollar, as the Fed’s bond purchase scheme would wind up in March and enable the Fed to begin raising interest rates soon after.

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USD/JPY Technical

• 113.95 is under pressure in resistance. The next resistance line is 114.50
• USD/JPY has support at 112.84 and 111.28

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