EUR/JPY Fundamental Forecast – February 1, 2016

The EUR/JPY added 1.40 as the yen tumbled ahead of the Bank of Japan decision and after a slew of economic data which printed in the red. Inflation data was a bit disturbing as well as household spending and industrial production. Household spending and factory output last month both slumped more than expected, while the jobless rate stood at 3.3 per cent in January, steady from the previous month. Meanwhile, separate data released on Thursday showed retail sales logging a second straight month of declines in December, indicating continued headwinds for the world’s third-biggest economy.
“’Abenomics’ has stalled,” said Japan Macro Advisors chief economist Takuji Okubo, referring to the economic policies advocated by Prime Minister Shinzo Abe to revitalize the moribund economy.
Japan is currently facing very low inflation, which means that people and companies tend to hold on to their money on the assumption that they can get more for it later in time.
So rather than spend or invest it, they will keep it in the bank. Cutting the cost of borrowing is an incentive that should boost both domestic spending and business investment.
It is also aimed at driving inflation up, which is another incentive for people and businesses to spend rather than save. Data also showed the country's industrial output dropped by 1.4% in December from the previous month - weaker than estimates had suggested.
It was the second month of decline, underscoring that flagging external as well as domestic demand was weighing on Japan's economy.
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