USD/JPY: US Fiscal Tightening Pushes Up Demand for the Yen

In yesterday’s trades, the Japanese yen won by 9 pips against the American dollar even as Prime Minister Yoshihiko Noda remained tight-lipped last Sunday. While the Prime Minister held talks with a heavyweight of his ruling party, the continued quandaries of America’s fiscal cliff had led investor confidence to shift from the Greenback to the Samurai.

Further, the Japanese are continuing to close their wallets as the economy’s outlook darkens, which makes is difficult for Prime Minister Yoshihiko Noda to stave off the nation’s third recession in four years. Households are holding the most cash since 2005, which shuns the risk as they grow gloomier as indicated by the Bank of Japan. While Prime Minister Noda may avoid a fiscal cliff as the opposition becomes increasingly open to a deal on deficit-financing legislation, the consumer malaise highlights the challenge of reviving growth in the world’s third-largest economy.

Meanwhile, President Obama and Congress will tangle at the edge of the fiscal cliff, that mix of expiring tax breaks and government spending cuts that will take effect during 2013 and beyond, could determine whether the economy sinks back into recession. If the US government officials can’t reach any sort of deal, a newly austere government sector would quickly put downward pressure on GDP growth and would drive unemployment up to 9.1 percent by the end of next year, according to a report by the Congressional Budget Office.

Hence, even as the Japanese economy is in a grim state, the graveness of the US’ fiscal tightening is bound to debilitate the Greenback, thus likely resulting to the immense of the Yen. In effect, a sell position is measured apt for the USD/JPY.

Aviv N. Shapiro is a Senior Research Analyst and Business Development Officer for AlgosysFx.