USD/JPY is approaching an important moment
USD/JPY is trading in the 110.00 area, where it recovered after hitting 105.55 at the beginning of this month. Among the factors, which influence the pair, we should mention the expectations about the actions of the US Federal Reserve and the market’s risk sentiment. This, however, is not all: Japanese internal affairs will play an important role in the future of the pair.
According to NTV, Japanese Prime Minister Shinzo Abe will conduct a press conference on Wednesday, June 1, addressing 2 questions – sales tax hike and snap election.
Japanese government is scheduled to raise sales tax from 8% to 10% unless there is a significant financial crisis or a major natural disaster. There’s speculation that Abe would postpone the sales tax hike and call a snap general election together with scheduled poll for parliament’s upper chamber on July 10.
Increase in sales tax alone would negatively affect Japanese economy (the last sales tax hike from 5% to 8% provoked a recession), so this measure should be either followed by fiscal stimulus or delayed. Moreover, higher tax would increase pressure on the Bank of Japan to ease monetary policy further.
Yen’s appreciation since the beginning of the year is already making life harder for Japan. At G7 meeting Japan was warned against interventions to weaken yen. Japanese Finance Minister Taro Aso said that a 2-day move of 5 yen in either direction would be considered one-way and lopsided and could push the government towards intervening at the currency market. Japanese authorities seem comfortable with the yen in the 109.00 area, so the pair should rapidly fall to 105.00 to trigger intervention.
If the tax hike is delayed, the yen should weaken making USD/JPY rise, while if Abe says that the tax hike will be conducted as planned, the yen will gain and USD/JPY will fall. As a result, we recommend you to stay tuned and watch what happens on June 1. In addition, we may get more comments on the issue from Japanese officials.