Japanese Yen: Nominal growth underpins cautious strength – Commerzbank

Commerzbank's Volkmar Baur predicts the Bank of Japan (BoJ) may raise rates again as early as September or October due to solid nominal growth and unexpectedly high inflation. Despite cautious market sentiment following recent interventions, these factors could support a modest strengthening of the Japanese Yen (JPY). Japan's real GDP grew by 0.3% in the second quarter, lower than analysts' expectations, but nominal GDP expanded by 1.2%, as anticipated, resulting in higher-than-expected inflation.

The yen has shown minimal reaction to this news. There are two reasons why the yen might actually benefit: first, growth of 0.3% is still substantial; an annualized rate of 1.1% indicates positive economic performance. Secondly, the higher inflation should maintain pressure on the BoJ to increase interest rates again in September or October, further boosting the JPY.

Additionally, recent reports suggest Japan's fiscal issues and high debt levels are weighing on the yen, but this view is deemed exaggerated. Japan has one of the lowest budget deficits among G10 countries, and while its debt is high, it is declining. Nonetheless, rising yields on Japanese government bonds have caused market nervousness.

However, the high nominal growth could positively impact the yen by increasing tax revenues and improving the fiscal situation. Despite market caution, fundamental improvements in the Japanese economy suggest a slightly stronger yen. The GBP/USD pair shows some dip-buying at the start of a new week and climbs above mid-1.3500s during the Asian session, nearing a three-month high on Friday.

The US Dollar remains selling-biased, favoring bullish traders and indicating the path of least resistance for spot prices remains to the upside.