Japanese Yen Weekly Forecast: Will Inflation and Labor Market Data Pressure USD/JPY?

USD/JPY Rallies on the BoJ and the Fed: What’s Next?

Here’s what traders need to know.

The USD/JPY pair extended its gains for the third consecutive week, rallying 1.81% to close at 156.364 on December 20. The pair touched a low of 153.156 early in the week before surging to a Friday high of 157.923.

The Fed’s less dovish rate path and the BoJ’s cautious stance drove the pair to 157 for the first time since July.

Upcoming BoJ Policy Minutes: Implications for the Yen

The Bank of Japan’s Monetary Policy Meeting Minutes require consideration on Tuesday, December 24. While the minutes are from the October monetary policy decision, they could give insights into the BoJ’s requirements for raising interest rates.

The BoJ’s recent decisions to keep rates at 0.25% suggest a wait-and-see approach, partly driven by uncertainty over global risks and insufficient wage growth. The Yen could face renewed selling pressure if the minutes reveal a preference to delay rate hikes.

Japan’s Leading Economic Index in Focus

On Wednesday, December 25, Japan’s Leading Economic Index (LEI) could influence USD/JPY trends. According to preliminary data, the Index slipped from 108.9 in September to 108.6 in October. A downward revision could dampen Japanese Yen demand.

The LEI considers consumer and business sentiment, indicating household spending and business investment trends. A lower LEI may signal a pullback in household spending and job creation, supporting the BoJ’s stance on interest rates. Conversely, a higher LEI could suggest a rosier macroeconomic backdrop and a potential Q1 2025 BoJ rate hike.

Inflation and Labor Market Data: BoJ’s Key Considerations

On Friday, December 27, crucial economic indicators, including inflation, retail sales, and labor market data, could influence the BoJ’s January interest rate decision.

Economists forecast Tokyo’s annual inflation rate ex-food and energy to rise from 1.9% in November to 2.0% in December. A higher-than-expected inflation rate would surpass the BoJ’s 2% target, potentially pressuring the Bank to raise rates. However, softer inflation may close the door on a near-term rate hike, allowing the BoJ to assess wage growth trends.

While inflation data is crucial, the BoJ’s focus on wage growth may give labor market data more weight. Economists predict Japan’s unemployment rate will remain at 2.5% in November.

An unexpected increase could temper bets on a Q1 2025 BoJ rate hike, impacting Japanese Yen demand. Conversely, a lower unemployment rate could signal a near-term hike. Tighter labor market conditions may bolster wage growth, fueling consumer spending and demand-driven inflation.

The BoJ’s recent focus on wages underscores the significance of upcoming labor market data.

Other stats include retail sales and industrial production data. Retail sales trends may influence inflation and sentiment toward Japan’s economy. Private consumption accounts for over 50% of Japan’s economy. However, industrial production data will reflect the demand environment. Japan is one of the top five global traders, underlying the importance of trade to its economy.

In addition to the data, Friday’s BoJ Summary of Opinions will shed more light on December’s decision to leave rates unchanged.

Potential USD/JPY Moves

Upbeat economic data could fuel bets on a January BoJ rate hike, potentially dragging the USD/JPY pair toward 150. Conversely, softer inflation and higher unemployment may drive the pair toward 160.

Expert Views on the Bank of Japan Rate Path

Natixis Asia Pacific Chief Economist Alicia Garcia Herrero commented on the BoJ’s monetary policy stance ahead of last Thursday’s decision. She stated,

“Continued inflation-wage virtuous circle should have supported a hike but politics getting on the way. All in all, the virtuous circle between inflation and wages has made further progress recently clearing the way for a hike but the BoJ does not seem so ready to go ahead, at least not just now. The Fed hawkish tone yesterday could make a pause more risky in terms of a further depreciation of the Yen.”

US Economic Data and the Fed Rate Path Outlook

On Monday, December 23, the CB Consumer Confidence Index will influence US dollar demand. Economists forecast the Index to rise from 111.7 in November to 113.0 in December. Improving consumer confidence could signal a pickup in consumer spending, fueling demand-driven inflation. A higher inflation outlook would support the Fed’s less dovish rate path outlook.

However, an unexpected fall below 100 may retrigger bets on a January Fed rate cut, dampening US dollar demand.

Durable goods orders will also draw interest on Tuesday. While trends may give insights into the manufacturing sector, the data is unlikely to influence the Fed rate path. The focus remains on inflation, the labor market, and the services sector.

However, initial jobless claims will require consideration on Thursday. Another fall in jobless claims would signal tightening labor market conditions, supporting consumer spending. However, an unexpected spike in claims may signal softer wage growth and consumer spending, potentially supporting a near-term rate cut.

In summary, expectations for a January Fed rate cut support a USD/JPY move toward 150. Conversely, falling bets on a Q1 2025 fed rate cut may drive the pair toward the 160 level.

Short-term Forecast:

Near-term USD/JPY trends will hinge on crucial economic data from Japan. Rising inflation and a tighter labor market would fuel expectations of a near-term BoJ rate hike. However, softer inflation and rising unemployment may enable the BoJ to wait for the spring wage negotiations before deciding its next move.

Investors should monitor real-time data, central bank decisions, and expert commentary to adapt trading strategies effectively. For timely insights and updates on FX market trends, follow our real-time analysis here!

USD/JPY Price Action

Daily Chart

After last week’s rally, the USD/JPY remains comfortably above the 50-day and 200-day EMAs, signaling bullish momentum tied to BoJ and Fed policy sentiment.

A USD/JPY break above the 156.884 resistance level would support a move toward last week’s high of 157.923. Furthermore, a return to 157.923 could enable the bulls to target the crucial 160 level.

Investors should consider the economic indicators, central bank commentary, and Japanese government warnings about an intervention potentially affecting USD/JPY price trends.

Conversely, a drop below 155 would bring the 50-day and 200-day EMAs into play. A fall through the 200-day EMA could signal a fall toward the 149.358 support level.

The 14-day RSI at 64.26 indicates a USD/JPY climb to 160 before entering overbought territory (RSI above 70).

Dive deeper into the trends. View our latest USD/JPY chart analysis for technical insights.