USD/JPY Forecast: BoJ Policy Outlook and Weak Yen Concerns Influence Trends

A Pivotal Week for the Japanese Yen

It could be a crucial week for the USD/JPY as investors consider the looming July 31 Bank of Japan monetary policy decision.

Japanese Government Voices Concerns About the Weak Yen

On Friday, July 19, the Japanese government revised its growth forecasts for the fiscal year ending March 2025 from 1.3% to 0.9%.

The Japanese government reiterated concerns about the weak Yen, reportedly stating,

“We can’t overlook the impact a weak yen and rising prices are having on households’ purchasing power,” the private-sector members of the council told Friday’s meeting that discussed the new growth forecasts.”

Previously, Bank of Japan Deputy Governor Ryozo Himino highlighted the weak Yen’s impact on the economy, stating,

“Exchange-rate fluctuations affect economic activity in various ways. It also affects inflation in a broad-based and sustained way, beyond the direct impact on import prices.”

Comments from the Japanese government suggest increased pressure on the BoJ to tackle the weak Yen.

The Weak Yen and the Japanese Economy

In Q1 2024, the weak Yen led to higher import prices, impacting household spending and the Japanese economy. A 0.7% fall in private consumption resulted in a third successive quarterly economic contraction.

Despite the weaker growth forecasts, investor bets on a July Bank of Japan rate hike linger. Economic indicators on Wednesday and Friday could dictate the BoJ’s policy maneuvers on July 31.

Japan’s Services PMI

On Wednesday, July 24, economists expect the Jibun Bank Services PMI to increase from 49.4 in June to 49.9 in July.

A higher-than-expected PMI could raise investor bets on a July BoJ rate hike. The BoJ needs the services sector to fuel demand-driven inflation. A sector returning to expansion could justify a rate hike to bolster the Japanese Yen.

However, investors should consider the sub-components, including prices. Higher wages would support a pickup in private consumption if a stronger Yen eases import price pressures.

Tokyo Inflation in Focus

On Friday, economists forecast Tokyo’s core inflation rate to rise from 2.1% in June to 2.2% in July.

A higher-than-expected core inflation rate could cement bets on a July BoJ rate hike.

Upward consumer price trends in Tokyo would align with national inflation trends. Japan’s inflation rate accelerated for the second month in June, supporting expectations of a July BoJ rate hike.

Bank of Japan Plans to Cut Japanese Government Bond Purchases

Beyond the possibility of an interest rate hike, the BoJ announced it would disclose its plans to reduce Japanese Government Bond (JGB) purchases in July.

A marked reduction in JGB purchases would likely narrow interest rate differentials between the US dollar and the Yen more significantly than rate hikes.

With US interest rates at 5.5%, a 0.1 to 0.5% increase by the BoJ would leave interest rate differentials firmly tilted toward the US dollar.

A BoJ rate hike and a convincing cut to JGB purchases could support a USD/JPY drop below 150.

What the Experts Say

Economists hold mixed views about the July BoJ monetary policy decision.

Unlimited Chief Investment Officer Bob Elliot commented on the national inflation numbers for June, stating,

“Japan continues to experience weak inflation, wage growth, demand, and GDP in contrast to much of the DW, with little urgency to tighten. While there are plenty of headlines trying to make a case for tightening, a more careful look at the data suggests little urgency.”

Bob Elliot attributed higher inflation to the roll-off of energy and travel subsidies. He also said there are expectations that the government will reintroduce subsidies in the summer, a downward drag on inflation.

Considering the likely effects of rate cuts and reductions in JGB purchases, the BoJ could cut JGB purchases more aggressively.

Nataxis Asia Pacific Chief Economist Alicia Garcia Herrero recently commented on JGB purchases, stating,

“Bank of Japan to start quantitative tightening, which could support the Yen more than intervention.”

US Economic Indicators

On Wednesday, the US housing sector will be in focus.

Economists predict existing home sales will increase by 3% in June after falling by 0.7% in May. Better-than-expected numbers could boost US dollar demand.

High demand for existing homes could tighten housing inventories and raise house prices. Higher house prices and tighter inventories may also push rental prices up. Higher rents can fuel housing services and headline inflation, which may reduce expectations of multiple 2024 Fed rate cuts.

However, investors should consider trends, as tight inventories can create volatile monthly existing home sales.

Short-term Forecast: Bearish

USD/JPY trends will depend on the July services PMI numbers (Wed), Tokyo inflation (Fri), and the US Personal Income and Outlays Report (Fri). Higher-than-expected Services PMI and inflation numbers from Japan could signal a July BoJ rate hike and a cut to JGB purchases.

Conversely, weaker US services sector activity and softer US inflation could support expectations of September and December Fed rate cuts.

Narrower interest rate differentials could support a USD/JPY drop below 150.

Investors should remain alert. Monitor real-time data, central bank commentary, and expert commentary to adjust your trading strategies accordingly. Stay updated with our latest news and analysis to manage USD/JPY volatility.

USD/JPY Price Action

Daily Chart

The USD/JPY hovered below the 50-day EMA while remaining well above the 200-day EMA. The EMAs confirmed the bearish near-term but bullish longer-term price trends.

A USD/JPY break above the 50-day EMA would support a move toward 160. A breakout from 160 could give the bulls a run at the July 3 high of 161.951.

Bank of Japan commentary and US existing home sales require consideration on Tuesday.

Conversely, a break below the 155 handle could signal a fall toward the 200-day EMA and the 151.685 support level.

The 14-day RSI at 40.43 indicates a USD/JPY drop below 155 before entering oversold territory.