The yen is modestly stronger against the dollar this morning although this is more a reflection of US dollar weakness and the drop in USD/JPY is no larger than dollar declines against other G10 currencies. There has been limited market reaction to the finalising of the US-Japan trade deal that saw President Trump sign an executive order detailing a 15% trade tariff on most imports, including autos. That takes Japan’s auto tariff down from 27.5% and is good news for the auto sector, MUFG's FX analyst Derek Halpenny reports.

Yen may be set for a period of outperformance

"There has also been limited market reaction to the stronger wage data released today. Total labour cash earnings jumped from 2.5% YoY in June to 4.1% in July. Gains over 4.0% are becoming more regular and the July print was the third time since June last year and confirms the strongest period of wage gains since the early 1990s. A 7.9% YoY in special cash earnings (summer bonuses) helped fuel the stronger overall increase but base wages also gained, from 2.6% to 2.8%."

"The details are certainly consistent with the BoJ hiking rates again. Ongoing caution and the uncertainty created by the threat to PM Ishiba’s position have been factors resulting in market pricing for an October rate hike coming down to just 8bps. Furthermore, while the signing of the US-Japan trade deal helps reduce uncertainty, trade uncertainties in general will undoubtedly persist. But for the BoJ the biggest issue related to an October rate hike is domestic politics. We will know more next week when the LDP makes its decision on Monday, based on an internal vote, whether to bring forward an LDP leadership election."

"An early LDP leadership election would be run in late September / early October which would mean a new PM would only just be in office and speculation on a general election would be high. Not the backdrop for a rate hike. It remains a close call and his rising approval rating is helping but momentum appears to indicate a continued gradual loss of support. The wage data today is telling us that the fundamentals are in place for a hike and there is scope for a repricing in the rates market if PM Ishiba manages to hang on and harden speculation on an October hike. The yen would then be set for a period of outperformance from current weak levels."