USD/JPY breaks higher. Nikkei 225 next?

Japan’s massive export sector is firing on the back of weakness in the yen, demonstrated by the significant contribution made to Japan’s GDP today from net exports in the June quarter. With the USD/JPY breaking to fresh highs on Monday, it begs the question whether there’s further upside to come for the exporter-heavy Nikkei 225?

Japanese exporters fire in the June quarter

Japan’s GDP blew even the most optimistic forecast out of the water in Q2, growing by an impressive 1.5% over the period, nearly doubling the median estimate offered to Reuters. However, underneath the headline figure, the details were less impressive unless you’re a Japanese exporter. Domestic demand detracted from quarterly growth, declining 0.3%, reflecting a substantial 0.5% contraction in household consumption. That may reflect the influence of broadening inflationary pressures with the quarterly deflator – a broad measure of inflation across the economy – increasing 3.4% from a year earlier, the fastest pace since 1981.

But those headwinds were more than counteracted by strong external demand with net exports adding 1.8% for the quarter, helped by 3.2% lift in export volumes over the period. Exporters are clearly enjoying tailwinds from the weaker Japanese yen, making their goods and services more competitive to the global marketplace.

USD/JPY breakout may add to corporate earnings tailwinds 

After an exploratory probe above the figure in Asia on Monday, the USD/JPY closed convincingly above 145 in New York, signalling the potential for the pair to make a run back towards the multi-decade highs just below 152 in October last year. Given the lack of concern expressed about the latest leg higher from Japan’s Ministry of Finance, buyers may emerge on pullbacks towards the 145 level.

Further yen weakness may add to tailwinds for Japanese exporters, potentially pointing to renewed upside in the Nikkei 225 which is laden with some of the largest and most recognisable global brands worldwide. 

-- Written by David Scutt

Follow David on Twitter @scutty