The Focus is on Japan After FX Warning

It may be true that most countries want a bit of FX weakness but there is a limit. Japan is beginning to show signs of strong growth and the USD/JPY rally abruptly ended Thursday on an FX quip from Fin Min Taro Aso. On the day, CHF led the way while the antipodeans lagged. The focus will remain on the yen with a slate of top-tier economic data up next.

It's been a generation since markets have had to deal with a strong Japanese economy and at the moment, the reaction is total skepticism if not disbelief. But Japan has strung together a few good months and the consensus for 2015 growth has moved close to 2% from 0.9% at the start of the year.

We don't know if Abenomics is really working but Japanese officials have maintained an upbeat outlook and talk of more QE has fallen to the wayside. If they believe they can achieve solid growth – which is anything close to 2% in Japanese terms – then they might believe USD/JPY at these levels is high enough.

The pair hit an airpocket on Thursday when Aso said recent currency moves were rough and that he will monitor forex moves carefully. USD/JPY quickly fell to 123.63 from 124.10 in the aftermath. We warned yesterday about the possibility of this type of comment and it will continue to be a risk in the pair.

Like the US, the outlook for the yen is data dependant. On the docket next is the jobs report and CPI at 2330 GMT, followed by industrial production 20 minutes later. National CPI is expected up just 0.6% in April so there is no immediate danger of nearing the 2% BOJ target.

April IP is expected up 1.0% m/m.