The Japanese yen climbed on Wednesday morning with the USD/JPY entering a bearish continuation after a pull-back to the 200-hour moving average.
USD/JPY hourly chart
Similarly, the EUR/JPY fast-approached a horizontal support level marked by a four-month low at 137.96. The intraday low is 138.04 as buyers stepped in to halt the decline, at least momentarily.
EUR/JPY Daily Chart
Quite possibly, not enough focus is being placed on Japan's progress towards its inflation target and structural reforms.
It should be noted that 'Abenomics' together with the Bank of Japan's (BOJ) ultimate bazooka of quantitative easing measures in April of 2013 was responsible for driving the USD/JPY from below 80 to comfortably above 100 in just over a year and a half.
Expectations were for a second round of QE but it may not be necessary for some time, if at all.
While the 'third arrow' of Abenomics may have been a bit disappointing so far, there could be some important structural shifts in the works. It should be noted that fiscal reform policies always tend to be slow.
For one, the government is planning to work out measures for accepting more foreign workers in Japan as part of a new growth strategy. The new rules would ease limits on the kinds of jobs permited for foreigners. Such a plan acknowledges the country's need to replace an aging population in the workforce.
Additionally, there will be new "strategic special zones" that promote deregulations and tax breaks. Japan is laying the groundwork for a corporate tax cut.
One sign of a possible economic rebalancing is that Japan gained status as a tourist attraction, generating the first tourism surplus in 44 years. Foreign tourists spent more money in Japan than the Japanese spent on their trips abroad. Two reasons are a cheaper yen - which lowers travel costs- and a larger middle class in Asian countries that is travelling more.
There is also some market chatter that concerns changes to both sides of Japan's public pension system, particularly how it will be funded and how the fund will allocate its investments. Potential increases to the retirement age and greater worker contributions would help make the system sustainable. On the investment side, the pension fund could be allowed to allocate more funds into equities and foreign investments, which is expected to weaken the currency as much as 10% and would possibly reduce pressure on the central bank.
If Japan finally achieves its inflation target and gets on track to putting its fiscal house in order by rebalancing its domestic economy, it may no longer need to depend on the central bank's weakening of its currency.
With a forex market that has been centering around monetary policy, traders should take note of fiscal policies and possibly a changing macroeconomic landscape. Analysts have long demanded structural reforms and Japan could be the country that is, at least to a certain extent, beginning that process.