This week, the biggest lesson in the market is that the global economy is weakening. This is after all the major central banks issued warnings about the growth, which justified their lack of action when making interest rates decision in the past two weeks. The Bank of Japan (BOJ) is particularly having a challenge because of the weakening global demand and weakening inflation. On Monday, the country released the trade data, which showed that exports and imports had declined in the past month. Exports declined by minus 1.6% while imports decreased by 6.7%. Exports are important for Japan, because the country depends mostly on selling to the rest of the world.
The situation for Japan got worse today because of the inflation numbers, which were released by the country. Again, these numbers showed that the inflation rate is way below the two percentage points set up by the BOJ. The data showed that the national consumer prices rose by an annualized rate of 0.2%, which was lower than the expected 0.3%. the core CPI, which excludes the volatile food and energy prices rose by 0.7%, which was lower than the expected 0.8%. Worse, the manufacturing PMI remained at 48.9. A PMI number below 50 is often viewed as a contraction in the sector.
Regardless of all these, the Japanese economy is doing well. The unemployment rate is still low while the economy is expanding at an average pace. However, with the rate of inflation so low, there is a possibility that the bank may continue to leave rates in the negative zone for longer. The problem with this is that it makes the financial sector less competitive. It also makes it difficult for the bank to react in a meaningful way in case of a recession or bear market.
This week, the USDJPY pair declined sharply after the BOJ decision. The pair declined, to a low of 110.322. This was the lowest level in months. The pair has consolidated along the three Bollinger Bands lines, which is an indication that the pair is likely to remain along these levels. In case of a major movement, it may be upwards because the US is at a better place than Japan.