Japan released retail sales numbers for March earlier in the Asia session which were significantly softer than expected and raise doubts about the health of the economy. Retail sales fell 1.9% in March, completely missing an expected 0.6% gain. Retail trade is now down an alarming 9.7% y/y, the biggest decline on record. This raises questions about the health of the domestic economy as consumers remain unwilling to spend after last year’s hike in the sales tax, despite some improvement in the outlook for wages.
The figures come just days before a policy meeting at the BoJ at which the bank could inject more stimulus into the economy. The BoJ is also going to release its semi-annual this week, which may include downward revisions to both growth and inflation forecasts, strengthening the case for further stimulus. However, optimism surrounding the recent spring wage negotiations and some signs of life in the domestic economy have tapered market expectations for further easing this time around. It may be a closer call than the market expects.
The yen didn’t react heavily to today’s numbers, but the threat of further easing may limit JPY upside. No matter which way the BoJ leans it may result in some volatile price action in the yen. USDJPY benefited from some widespread US dollar weakness overnight on the back of softer than expected US economic data.
A flash Services PMI reading for April dropped to 57.8, missing an expected smaller deterioration to 58.8 (prior 59.2). This has added weight to the growing belief that the Fed’s tone at this week’s FOMC policy meeting will be more dovish than at prior meetings, which is backed by other weak points in the economy and is hurting the US dollar.
Nonetheless, USDJPY hasn’t broken any major support zones and remains trapped in a broad range between 118.50 and 120.-121.00. With policy meetings at both the FOMC and the BoJ this week, it may not remain in this range for long. If the Fed introduces a more dovish tone at its meeting then US dollar could face another wave of selling, but if it doesn’t the dollar may be subject to a relief rally. In Japan, if the BoJ introduces QQE3 then the yen is likely to take a big hit, but it may rally if the bank holds firm this time around. In any event, we will be eyeing USDJPY to see if it can break out of its recent trading range.