EUR/JPY hits 15-year high as BoJ indicates it remains dovish

Today while Japan industrial production contracted 2% in July month-on-month, affected by weakening overseas demand and China's economic slump, retail sales rose 6.8% in July from a year earlier, beating the market forecast for a 5.4% gain and marking a 17th month of increase. All this comes as one Bank of Japan member, Toyoaki Nakamura, warned it would be premature to tighten monetary policy.

(Video Transcript)

EUR/JPY

So the EUR/JPY has hit a new 15-year high in the last 18 hours or so, a combination of still hawkish European central bank activity and a still dovish Bank of Japan. Let's take a look at what we've got today in terms of some of the economic data.

Industrial production contracted 2% in Japan in July, month on month, affected by weekly overseas demand and China's economic slump, but the consumer isn't too badly affected. Retail sales rising 6.8% in July from this time last year, beating the market forecast for 5.4% gain and marking a 17th month of increase.

The Bank of Japan

Now where this can best be seen I think is on this EUR/JPY trade where we've seen that market pop up yesterday above the previous high. If you look at the chart here, 159.50 was where we were at the previous high and yesterday we went to 159.76, a new 15-year high for the EUR/JPY.

Diverging comments from Bank of Japan board members suggesting there is clearly no consensus on how soon the Bank of Japan can sail back its massive monetary stimulus. One of them, Naoki Tamura, said yesterday that Japan's inflation is clearly in sight as the central bank's target, but this morning another board member, Toyoki Nakamura, warned that it would be premature to tighten monetary policy.

Inflation

Recent increases in inflation were mostly driven by higher import costs rather than wage gains, he said, and tightening before rising prices accompanied by higher wages would hit domestic demand and corporate profits. The big cross, of course, is what's happening with the USD/JPY and we're not too far away from the highs that we've seen recently which went into that area of the market where previously we had seen the Japanese authorities enter to try and weaken, strengthen the JPY, I should say.

This is the US dollar rising against that weaker Japanese yen in the last few days. We've seen the highs, not seen since the 4th of November, so not trading too far away from that, but the big move is on the Euro-Yen.