Japanese Yen Rises as Economic Recovery Continues

The Japanese yen made gains against major rivals on Tuesday, following signs that the Japanese recovery is continuing. At the moment, the U.S. dollar lost 0.15% of its value to trade around ¥80.14, while the euro lost 0.64% to trade around ¥111.88.

The yen found support in better than expected economic activity data. According to the Ministry of Economy, Trade and Industry data, Japan's tertiary industry activity index rose 0.9% in May, from a month earlier, which was above analysts' expectations of a 0.7% increase. The May value is still much below April's 2.5% rise. In April, however, the index rebounded strongly following the earthquake and tsunami that have caused havoc in Japan in March.

The Japanese economy has been hit hard by natural disasters recently, which caused energy shortages and supply disruptions. An inadequate response from the Japanese government has forced Japan's prime minister to announce he will leave his post early. The latest results, however, will come as an encouragement to traders as Japan shows more signs that its economic recovery is gaining speed.

The Bank of Japan is still not convinced that Japan's economic recovery is on firm footing, so it decided to leave its interest rates unchanged at 0.1%. The Japanese interest rates have very low for some time now, as inflation remained low. The latest data, however, points to a rising inflation. In June, Japan's corporate goods price index rose 2.5%, compared to a year earlier. The June value was above 2.2% recorded in May and 2.4% expected by most analysts.

Rising inflation is generally a sign to start worrying about the economy overheating. Japan, however, has been fighting deflationary pressures for over a decade now. Japan's experience has suggested fighting deflation is much more difficult than fighting inflation. As a result, some analysts might see rising inflation as a good sign, since it might signal that the time of deflation is behind the world's third largest economy.

Japan's economic results might not seem spectacular, but when taken into comparison with the news from the Eurozone and the United States, Japan's economic data starts looking much brighter. In Europe, the Eurozone still did not resolve the Greek crisis and it seems the crisis has spread to Italy, the Eurozone's third largest economy. On Friday, the shares of the largest Italian banks fell sharply, and their losses continued in Monday's trading as well. In the United States, President Obama and his Democrats are locked in a battle with the Republicans, which control the House of Representatives, over raising the debt ceiling. If there is no agreement soon, the U.S. government might be forced to shut down, which could send massive shockwaves through the financial markets.

ACTION ITEMS:

Bullish:
Traders who believe that the Japanese recovery will continue gathering speed, which should provide a lot of tailwind for the yen, especially in the light of massive problems in the Eurozone and the United States, might want to consider the following trades:

• WisdomTree Dreyfus Japanese Yen Fund (NYSE: JYF) is a long play on the yen. JYF will rise if the yen appreciates.

• ProShares Ultra Yen ETF (NYSE: YCL [FREE Stock Trend Analysis]) is another long play on the yen. YCL will rise more than JYF, however, if the yen appreciates.

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