The yen strengthened against the euro dollar yesterday, following the release of robust industrial production data. The victory of Yoshihide Suga in Japan’s ruling party election also inspired confidence among market participants. Suga is widely expected to continue with the economic policies laid out by his predecessor Shinzo Abe. In the past 24 hours, the EUR/JPY pair had declined from a high of 125.90 to a low of 125.36.
The Ministry of Economy, Trade and Industry (METI) stated that industrial production (final) increased 8.7% m-o-m in July, following a 1.9% expansion in the earlier month. Economists had anticipated no change in the preliminary estimate of 8% growth in industrial production.
Shipments increased 6.6% m-o-m in July, versus 6% growth anticipated by economists. Inventories declined 1.5% m-o-m in July. On a y-o-y basis, industrial production fell by 15.5% in July. The initial estimate indicated a decline in the output by 16.1%. The capacity utilization surged 9.6% m-o-m in July and 19.2% on a y-o-y basis.
However, tertiary industry activity fell by 0.5% m-o-m in July, following a 9% growth in the earlier month and missed the 0.6% increase anticipated by economists.
Data indicated that broad-based personal services fell by 1.4% in July, but business services grew 0.5% in the same period. Retail trade, gas, electricity, water, insurance, finance, healthcare, rental goods, and leasing contributed to the decline. On the contrary, wholesale trade, information and communication, retail sales, transport, and postal activities contributed to the increase. On a y-o-y basis, tertiary activity fell by 9.4% in July.
In a notable development, Japan’s Chief Cabinet Secretary Yoshihide Suga, the loyal aide of exiting Prime Minister Shinzo Abe for the past eight years, won easily in an election conducted to choose the ruling party chief. Suga garnered 377 votes, representing 70.50% of the 534 votes cast in the ballot.
This implies Suga will reign as the next Prime Minister after the country’s longest-serving Prime Minister Abe, quit unexpectedly last month because of a health condition (ulcerative colitis, a chronic digestive disorder). In his victory speech, Suga, son of a strawberry farmer from north-east Akita province, stated that he would carry on with the implementation of policies devised by Abe, while carrying out administrative reforms.
Notably, Suga takes over an economy in recession. In addition, the country faces issues such as the ageing population, low birth-rate, and China’s aggression in the South China Sea.
According to Eurostat, Eurozone industrial production increased 4.1% m-o-m in July, following a 9.5% growth in the earlier month and a notch higher than the 4% growth anticipated by analysts. However, compared with July 2019, industrial production has declined 7.7% in July 2020.
Production of capital goods increased 5.3% m-o-m in July. Likewise, durable consumer goods posted a growth of 4.7% in July. Also, intermediate goods and non-durable consumer goods recorded an expansion of 4.2% and 3.9%, respectively. The energy sector posted a small growth of 1.1%.
Nevertheless, on a y-o-y basis, capital goods declined 10.4%, while intermediate goods fell by 9.3%. The energy and durable consumer goods sector decreased 6.2% and 3.8%, respectively. Non-durable consumer goods also dropped by 1.9%.
As Suga has indicated willingness to continue following the policies of his predecessor, the market gave a thumbs up to the yen. The impressive industrial production data also fueled the rise.
Technically, the EUR/JPY pair is declining after facing resistance at 126.15. The next support is anticipated only near 124.50. The currency pair is trading below its 50-day moving average, while the stochastics indicator is in the bearish zone. Therefore, we are anticipating the EUR/JPY pair to remain bearish in the short-term.
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