Forex Market: EUR/JPY edges slightly higher following larger-than-expected Japanese trade deficit

The euro advanced against the yen on trading Wednesday after Japans trade deficit widened more than analyst expected in February, hindering the nations recovery ahead of a sales-tax increase in April that may weigh on domestic demand.

EUR/JPY touched a session high at 141.57, after which the pair consolidated at 141.40, adding 0.05% for the day. Support was likely to be received at March 18 th low, 140.75, while resistance was to be met at March 18th high, 141.97.

The Japanese Ministry of Finance reported today that the nations trade deficit widened to 800 billion yen (approximately $7.9 billion), exceeding analysts estimates of a 600 billion yen shortfall. However, the deficit was much lower than Januarys record shortfall of 2.79 trillion yen. Data also revealed that exports rose 9.8% in February from a year earlier, while imports expanded 9%. Imports have exceeded exports for 20 consecutive months.

Protracted trade shortfalls and only minor increases in exports after the yens recent drop, will reinforce the economic turbulence, Japan is likely to experience after the sales-tax increase.

Effective from April, the sales-tax will rise to 8% from the current level of 5%. This will be the first increase of of the levy in 17 years.

“The trend of a moderate expansion in trade deficits remains intact,” said Long Hanhua Wang, an economist at Royal Bank of Scotland Group Plc in Tokyo, cited by Bloomberg. “In the near-term the rise in imports will moderate as the temporary effect fades of imports being pushed higher by demand ahead of the sales-tax increase.”

In January, core inflation was 1.3%, matching the strongest level in more than five years and adding to signs of progress toward BoJs inflation target of 2%.

Japans GDP will contract in the second quarter and the Bank of Japan may be pushed to add to record stimulus this year, according to Bloomberg News surveys of analysts.

Meanwhile, the 18-nation common currency continued to be pressured after economic sentiment data for Germany and for the euro zone as a whole came in well-below expectations.

Economic sentiment in the largest euro area economy, Germany, deteriorated sharply, reaching a 7-month low in March, data by the ZEW Centre for Economic Research showed yesterday.

The ZEW (Zentrum für Europäische Wirtschaftsforschung), reported that its index of German economic sentiment slid by 9.1 basis points to reach 46.4 this month, the weakest level since August, from a reading of 55.7 in February. At the same time, analysts had expected a smaller drop by 2.7 basis points to 53.0 this month.

In addition, the euro area economic sentiment also registered a decline, coming in at 61.5 in March, down from 68.5 in the previous month and as analysts projected the index will decline to 67.3 this month.