Japanese Yen Rises Despite Higher Unemployment and Inflation

The Japanese yen rose against major currencies on Friday as reports suggested Japan's inflation and unemployment are on the rise. At the moment, the U.S. dollar trades around ¥77.55, or 0.21% below its previous close. At the same time, the yen is approaching the ¥110 mark against the euro as the European currency surrendered 0.49% of its value to trade around ¥110.81. On Friday, Japan's economy posted mixed results. For once, the country's unemployment rate surprisingly edged higher to 4.6% in June, when most analysts expected it to remain unchanged from 4.5% recorded in May. The figures excluded the areas directly affected by the earthquake and tsunami disaster back in March. Rising unemployment came hand in hand with rising inflation. In June, Japan's core CPI rose 0.4% on a yearly basis, slightly below analysts' expectations of a 0.5% rise. CPI for the Tokyo area, for which data is available one month in advance, was 0.4% higher in July than a year ago. Rising inflation is normally a bad sign for the overall health of the economy as it puts pressure on the monetary authorities to tighten their belts. However, Japan has been struggling to fight off deflationary pressures for more than a decade, so rising inflation might be interpreted as a sign that Japan may be about to shake off deflationary pressures for good. Japan's factory output also managed to underperform. According to the Trade Ministry, factory output rose 3.9% in June from 6.2% in May, when most analysts predicted a 4.5% increase. The June figure was hit by strong yen, which is threatening to undermine the performance of the country's big exporters like Nissan Motor Company and Toyota Motor Corporation. One area where the Japanese economy managed to beat market expectations was housing starts. According to the Ministry of Land, housing starts rose 5.8% year-over-year in June, a third straight month of increases. In May, housing starts were 6.4% above their value a year ago, but analysts were expecting the June figure to be an even steeper fall to 5%. Overall, the data published on Friday show that Japan is recovering from the double natural disaster that has struck the island nation a few month ago. However, the latest data equally point out to the fragility of Japan's recovery, especially in the jobs market. Traders seemed to focus on the positive side of the story as the yen strengthened against its main rivals. However, strong yen seems to be one of the reasons why Japan's economy is not able to rebound more strongly. Japan is an exports-driven economy and strong yen is making its exporters less competitive in the global markets. ACTION ITEMS:

Bullish:
Traders who believe that Japan is slowly but surely on its path to full recovery following devastating natural disasters, which should provide some tailwind for the yen, might want to consider the following trades:

• CurrencyShares Japanese Yen Trust ETF FXY is a long play on the yen. FXY may rise if the yen appreciates.

• ProShares Ultra Yen ETF YCL is another long play on the yen. However, YCL should rise more than FXY if the yen appreciates.

Bearish:
Traders who believe that the yen is already riding too high and is damaging the country's mighty exports sector, thus threatening Japan's economic recovery, may consider an alternate positions:

• ETFS Short Japanese Yen Long US Dollar ETC (Sterling) ETF (SJPP) is a short play on the yen. SJPP may rise if the yen depreciates.

• ProShares UltraShort Yen ETF YCS is another short play on the yen. However, YCS should rise more than SJPP if the yen depreciates.

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