Yen Weakness Deepens as Japan's Trade Deficit Hits Record High

The Japanese Yen (JPY) is struggling to stay afloat amidst a widening trade deficit and escalating import costs. The USD/JPY currency pair has appreciated, trading around 158.50 during Asian hours on Thursday. This comes as Japan's Merchandise Trade Balance Total showed a sharp increase in the trade deficit to JPY 634.5 billion in July from JPY 409.9 billion the prior month.

Although the figure came in below market forecasts of a JPY 680.0 billion deficit, it marks the third consecutive month in the red and the largest deficit recorded since January. Exports surged 23.2% year-on-year to JPY 11,511.8 billion, beating expectations, while imports jumped even faster, rising 27.8% year-on-year to JPY 12,146.3 billion.

Strategists at Societe Generale remain cautiously constructive on the Yen's medium-term prospects but stress that any meaningful recovery will be conditional. They argue that a yen recovery is possible 'with the caveat that it will probably take another round of FX intervention to turn USD/JPY lower, unless oil prices fall significantly and remove that headwind from the growth outlook.'

The upside of the USD/JPY pair could be restrained as the US Dollar (USD) faces headwinds due to recent economic data and Federal Reserve policy expectations. The CME FedWatch Tool shows markets are now pricing in just a 32.7% probability of a Fed rate hike at the next meeting, down from 47% a month ago.