Pound Japanese Yen (GBP/JPY) Exchange Rate Rises as Japan’s Recession Recovery Hopes Fade

fPound Sterling Japanese Yen (GBP/JPY) Exchange Rate Increases as Japan’s Exports Extend Slump

The Pound Sterling Japanese Yen (GBP/JPY) exchange rate rose by 0.2% on Wednesday morning. This left the pairing trading at around ¥139.7530.

The Japanese Yen was left under pressure after Japan’s exports continued to slump into a fifth month in July.

The coronavirus pandemic took a heavy toll on the country’s auto shipments to the US. This dampened hopes for a trade-led recovery from Japan’s deep recession.

Shipments to the United States tumbled -19.5% as demand for engines and automobiles weakened. This weighed on the Yen as this is a sign the country is feeling the effects of a slow US recovery.

Added to this, Japan’s core machinery orders unexpectedly plummeted to a seven-year low in June. This is a key indicator of business spending and also weighed on hopes that domestic demand could make up for the sluggish global growth.

The latest data suggests the dire conditions seen in the world’s third-largest economy showed no signs of improvement in the current quarter. This also creates challenges for policymakers as they make attempts to prop up the country’s activity.

Exports plummeted -19.2% in July compared to a year earlier, although a slightly smaller fall of -26.2% slump in June.

Masaki Kuwahara, senior economist at Nomura Securities noted:

‘Today’s trade data confirmed that external demand hit bottom and is heading toward gradual recovery.

‘But the pace of recovery remains slow. Given the risk of a second wave of infections, it will take a couple of years before exports and GDP return to pre-pandemic levels.’

Sterling (GBP) Rises as Inflation Unexpectedly Rises

The Pound edged higher against the Japanese Yen after the latest data showed UK inflation unexpectedly rose to 1% in July.

Britain’s Consumer Price Index (CPI) jumped to the highest level since March as clothing stores refrained from the usual summer discounts.

Data from the Office for National Statistics (ONS) showed clothing and footwear were the largest contributors to inflation last month.

Added to this, data also showed core inflation rose to its highest level in a year. Core consumer prices jumped from June’s 1.4% to 1.8% in July despite markets expecting it to slide to 1.3%.

According to Equals Money’s Chief Economist, Jeremy Thomson-Cook:

‘Inflation is showing signs of a v-shaped recovery – not what consumers need at all – following an increase to 1% in July compared to this time last year. The rise was underpinned by increases in clothing prices as well as furniture and transport costs with gains also seen in culture and recreation and health. Consumers evidently had a pent up demand for summer clothes, haircuts and road trips to the beach.

‘While an inflation rate of 1% is still well below the Bank of England’s targeted figure of 2%, a period of rising inflation alongside the other well-known issues that the UK economy has to navigate in the coming months – an end to the furlough scheme and a decision one way or the other on Brexit – would make things even more painful for those whose incomes have been hit by the pandemic.’

Pound Japanese Yen Outlook: Japanese Inflation in Focus

Looking ahead, the Pound (GBP) could edge higher against the Japanese Yen (JPY) following the release of the latest Confederation of British Industry’s (CBI) Industrial Trends Orders.

If data improves more than expected in August, it will offer Sterling an upswing of support.

Meanwhile, the Yen could suffer losses if Japan’s latest inflation data disappoints markets.

If July’s inflation rate stagnates or contracts, it will send the Pound Japanese Yen (GBP/JPY) exchange rate higher.