Japanese Yen Retreats Despite Falling Unemployment

The Japanese yen retreated against major currencies of Friday, despite improvements in unemployment and inflation data. At the moment, the U.S. dollar moved 0.18% higher against the yen to trade around ¥80.81. At the same time, the euro, rejuvenated after the Greek parliament voted in a package of deeply unpopular reforms, rose 0.28% to ¥117.18. The yen fell in spite of some positive data coming from the Japanese economy today. For instance, Japan's unemployment rate fell unexpectedly in May to 4.5%, from 4.7% in April. Most analysts had expected the unemployment figure to rise to 4.8% in May. At the same time, Japan's core consumer price index managed to beat market expectations and rise 0.6% in May (year-over-year), when most analysts predicted it to be 0.5% above the value recorded a year ago. In April, Japan's price level was 0.6% higher than in April 2010. Tokyo's core CPI, for which data are available a month in advance, remained 0.1% higher than a year earlier, the same as in May. In this case, however, analysts had predicted a slightly higher value of 0.2%. In normal circumstances, rising inflation might a problem, since normally it would put pressure on the central bank to start tightening its monetary policy. Japan, however, has been fighting deflationary pressures for two decades and rising price level is a sign that domestic demand is rebounding. Japan has been recently hit hard by a double disaster, first the earthquake and then the tsunami, which has ravaged parts of Northeast Japan. The effects of these disasters are still felt, as they brought power shortages and supply disruptions, hurting the performance of Japan's manufacturing sector. Falling unemployment, along with rising inflation, will certainly provide more proof for analysts that Japan is turning the corner. It might seem odd that these data did not reflect in the rising value of yen, however. One possible explanation is that the value of yen was pushed too high by the debt problems in the Eurozone and the United States in recent weeks. Following the successful resolution of the Greek debt crisis, at least for the time being, some analysts might be more encouraged that the American political elites will find a way to raise the U.S. debt ceiling, a measure desperately needed if the U.S. government is to avoid a shutdown. Resolution of debt problems in other parts of the world has just helped the yen to reach its "appropriate" value. Another possible explanation is falling global demand. Japan has been one of the world's major exporters for some times now, and signs of global economic slowdown will have an adverse effect on the country's exporters, especially in manufacturing. Even though the worst case scenario has been averted in Greece, the Eurozone is still nowhere near to resolving its debt problems, while the impact of political fighting in the U.S., which threatens to shut down the government, has many analysts worried as well. Problems in the two largest economic blocks threatens to halt the recovery of the global economy, which pushed the prices of commodities lower. In today's trading, gold fell back below the $1,500 level, trading at $1,499.35, or 0.1% below yesterday's close, while silver lost 0.65% of its value to stand around $34.48. Fossil fuels also retreated, with crude oil down 0.32% to $94.63 and natural gas down 0.55% to $4.358. The price of copper remained roughly the same as yesterday's close, however, at $4.270. Further fears about the prospects for Japan's manufacturers comes from the Tankan business sentiment index. In June, the index plunged to -9 from 4 in May. Readings above zero indicate optimism while readings below zero indicate pessimism. This is the first time in 15 months that the Japanese business people are mostly pessimistic about their prospects. Traders who believe that Japan's domestic demand is turning the corner, indicated by the falling unemployment and rising inflation, which should provide a boost for the country's economy and its currency, will be interested in the CurrencyShares Japanese Yen Trust ETF FXY, the JPY/USD Exchange Rate ETN JYN and the ProShares Ultra Yen ETF YCL. Other traders might be more interested in what is happening to global demand. Debt problems in the Eurozone and the United States might lead to a global economic slowdown, and falling commodity prices fit well into that story. Japan's economy depends a lot on the performance of its exporters. As a result, traders who believe in the scenario of falling global demand will be less optimistic about the prospects of the Japanese economy. These traders will be more interested in the ProShares UltraShort Yen ETF YCS.