OANDA senior currency strategist Alfonso Esparza highlights the good, the bad, and the ugly side of a weaker Japanese yen and the effects on the economy of Japan, along with the rest of the global markets.

A weaker JPY can be a bane and a blessing to Japan. It does have benefits for exporters, which can increase their earnings. The stock market has captured that sentiment as the stock market keeps rising. A weak currency in the long-term can also bring about a higher cost of imports. For an island nation—that depends on energy and food imports that could lead to higher prices not driven by consumers—therefore not positive to growth.

There is a good, a bad and an ugly side to the weaker JPY:

The Good

Tokyo stocks ended last week near a seven year high. The weaker yen ended around 109 boosted by the strong rally of the US dollar after the FOMC. Exporters had a great day as they gain a competitive edge due to the weaker currency. Auto, machinery, and precision instruments were pushed higher. There were sectors that depended on imports that were the biggest losers of the session. Household wealth has risen due to gains in the stock market and land prices.

The Bad

Japan’s economic assessment was downgraded by the government. It is the first time in five months that the monthly economic report included the words “moderate recovery” to describe the Japanese economy. Consumer spending has been hard hit by the newly introduced sales tax hike in April. While a good move for the fiscal health of the country, it appears to have sapped all the momentum regarding consumer demand.

The Ugly

At face value, the weaker Yen might be a boon for Abenomics. The fact is that the inflation target of 2% might be reached, but it’s not the right kind of inflation. Shinzo Abe’s plan was to have higher demand that would set Japan back on the growth path. Instead, there are rising costs due to imports. Energy and food in particular that could have an adverse effect as people consume even less as wages do not keep up with inflating prices.

Next Week for Asia:

The US Federal Reserve FOMC meeting captured the market’s attention last Wednesday. In the end, everything came in as expected. The Fed will end the tapering program in October, which makes the timing of the first rate hike a bigger possibility. Janet Yellen made her best to both reassure the market it is coming, but to calm investor’s nerves by telling them it is not going to be in the immediate future. There are still factors of the economy that haven’t recovered to pre-crisis levels.

The Scottish referendum was the other major event last week that jilted trader’s nerves. A month ago, the Yes Vote did not seem like a legitimate treat to the United Kingdom, but a strong social media campaign and some backfire from scare tactics from the No Vote made the turn out closer than originally expected. A 55% win has calmed stock markets around the globe and they are picking off where they left off.

Next week will not have events with such a significant impact in the currency markets. Two events in Asia are worth focusing on. The Chinese flash PMI complied by HSBC will be released on Monday. The previous reading was disappointing after it barely registered above expansion at 50.3 missing the forecast. It proved to be part of a slowdown trend in China. The Chinese government has injected $81 Billion to the biggest state-owned banks to boost growth. A weaker PMI might justify that decision.

The Reserve Bank of Australia’s Governor Glenn Stevens will address the Melbourne Economic Forum. Australian employment has improved beating expectations in the September 10 release. The record numbers will give Stevens some cushion after the Australian economy’s growth was questioned. It will be interesting to watch what the Governor has to say about the surprising positive indicator on Wednesday.

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By Alfonso Esparza,Senior Currency Strategist, OANDA