USD/JPY Forecast: BoJ’s Yen Strategy Under Scrutiny Amid Economic Indicators

Will the Government Leave it to the BoJ to Address Yen Weakness?

On Tuesday, June 25, the Japanese Yen and USD/JPY trends could be the talking point for the Japanese government and the Bank of Japan.

The Japanese government previously attempted to bolster the Japanese Yen, only for the USD/JPY to retarget the 160 handle on Monday, June 24. On May 3, the USD/JPY dropped below the 152 handle before climbing to a Monday high of 159.929.

A dovish June Bank of Japan monetary policy decision impacted buyer demand for the Japanese Yen. The BoJ disappointed the markets by holding interest rates steady and failing to signal a July rate hike.

In previous speeches, the BoJ warned about the influences of a weaker Yen on import costs, consumption, and the economy.

BoJ Deputy Governor Ryozo Himino recently said,

“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.”

However, BoJ Governor Kazuo Ueda towed a more cautious line, highlighting that further rate hikes would be contingent on incoming data.

Recent private sector PMI numbers are unlikely to meet the requirements of the BoJ to hike interest rates. The BoJ needs the services sector and household consumption to fuel demand-driven inflationary pressures.

However, the Jibun Bank Services PMI unexpectedly fell from 53.8 to 49.8 in June, contracting for the first time since August 2022. Notably, output price inflation rose at the slowest pace in seven months.

With economic indicators falling short, the BoJ may need to change tack and emphasize the effects of a weak Japanese Yen, supporting the case for a rate hike to strengthen the Yen, consumer price trends, and the economy.

Can Bank of Japan Board members align on the need for monetary policy moves to address the Yen effect?

While the BoJ faces Yen weakness, US consumer confidence numbers could influence the Fed rate path.

Will the CB Consumer Confidence Index Signal a September Fed Rate Cut?

Later in the session on Tuesday, the CB Consumer Confidence Index will draw investor interest. Economists predict the CB Consumer Confidence Index will fall from 102.0 to 100.0 in June. A drop below 100, for the first time since July 2022, could raise investor bets on a September Fed rate cut.

A significant decline in consumer confidence could curb consumer spending, potentially easing demand-driven inflation pressures. A milder inflation outlook might allow the Fed to cut interest rates to stabilize prices.

Could a larger-than-expected decline in the index rekindle investor concerns about a severe economic slowdown?

A larger-than-expected drop could retrigger investor jitters about a US economic recession. Private consumption contributed 67.6% to the US economy in March 2024. A sharp decline in consumption may adversely affect the US economy.

Dana M. Peterson, Chief Economist at the Conference Board, attributed the CB Consumer Confidence Index fall below 100 in April 2024 to consumer worries about inflation.

As investors consider the possible effects of consumer confidence trends on the Fed, Fed speakers also require monitoring.

FOMC members Lisa Cook and Michelle Bowman are on the calendar to speak. Views on the economic outlook, inflation, and the Fed interest rate trajectory could affect buyer demand for the US dollar.

Short-term Forecast

Near-term trends for USD/JPY will depend on commentary about Yen weakness, Japanese retail sales, and inflation data. Better-than-expected numbers from Japan could enable the BoJ to begin rate hike discussions. Yet, US consumer confidence and inflation figures could maintain interest rate differentials firmly in favor of the US dollar.

USD/JPY Price Action

Daily Chart

The USD/JPY remained well above the 50-day and 200-day EMAs, confirming the bullish price trends.

A USD/JPY move to 160 and potentially to the April 29 high of 160.209 could signal a climb to the 161 handle.

Comments from the Bank of Japan and the Japanese government about the Yen require consideration before the US session.

Conversely, a USD/JPY break below the 158 handle could give the bears a run at the 50-day EMA. A drop below the 50-day EMA would bring the $151.685 support level into view.

The 14-day RSI at 68.40 suggests a USD/JPY return to the April 29 high of 160.209 before entering overbought territory.