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USD/JPY: will Abe add stimulus? (video)

   Kira Iukhtenko, FBS analyst

This week USD/JPY failed to extend the upside, retracing down from the 104.20 resistance. Safe-haven Japanese yen attracts investors as geopolitical tensions in Ukraine stay on the central stage. 

Japan data released on Friday confirmed a loss of economic momentum: July industrial production missed estimates, while household spending slumped. Consumption in Japan was hurt by the inflation generated by the BOJ stimulus and the sales tax hike In April. Japan disposable income fell by 5.2% in July. 
Japan inflation rate remained unchanged in July (core CPI +3.3%), highlighting the BOJ challenge to reach the inflation target by April 2015. According to the recent Bloomberg survey, only 4 of 33 economists believe the plan is achievable. What’s more, jobless rate increased to 3.8%, putting the BOJ’s legend that “a stronger labor market pushes wages and inflation up” in doubt. 

With every passing day, expectations for additional BOJ stimulus are growing. Quarter of the economists surveyed by Bloomberg expect more QE to be announced already in October 2014. Don’t forget that BOJ will also release revised economic projections in October – forecasts are widely expected to be lowered. The financial markets are already beginning to price in all these yen-negative expectations. There is now a strongly bullish USD/JPY fundamental background being built. 

Next week Japan will release Q2 capital spending data (Monday) and average cash earnings data (Tuesday). The Bank of Japan holds its monetary policy meeting on Thursday (Sept. 4). Don’t miss the press-conference after the meeting – we’ll get a chance to appraise the BOJ sentiment. 
From the technical viewpoint, the bearish correction could extend a little longer. Support for the pair lies at 103.50 and 103.00 and we expect the last level to limit the decline. Break above the 104.00/20 resistance will open the way to our next target at 105.40. As can be seen from the weekly chart, the pair has recently formed a golden cross. 

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