USD/JPY Forecast: How Japanese Services PMI May Affect BoJ’s Interest Rate Decision?

Will services PMI numbers from Japan send the USD/JPY higher?

Japan Services PMI Crucial to the Bank of Japan Plan to Raise Interest Rates

On Wednesday, July 3, finalized Jibun Bank Services PMI numbers from Japan will garner investor interest.

According to the Flash PMI Survey, the Jibun Bank Services PMI declined from 53.8 in May to 49.8 in June.

A more marked contraction could reduce investor bets on a July Bank of Japan rate hike. Beyond the headline figure, investors should consider price trends. The Flash survey revealed a pickup in input price inflation but weaker output price inflation.

S&P Global Market Intelligence Associate Director Jinyi Pan commented on price trends, saying,

“More concerning, however, is the pressure on margins for Japanese firms. Average input costs rose at the fastest pace in over a year while output price inflation softened in June, particularly in the service sector. Anecdotal evidence suggested that the effects of a weak Yen and rising labor costs brought up cost inflation.”

For context, the Japanese services sector previously contracted in August 2022. A service sector contraction is significant in Japan, with services contributing about 70% to the Japanese economy.

Will the Bank of Japan be able to raise interest rates and cut Japanese Government Bond (JGB) purchases to bolster the Yen and support the Japanese economy?

BoJ Deputy Governor Ryozo Himino recently called for action, saying,

“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.”

The BoJ may tighten policy irrespective of the macroeconomic environment if the Yen does not strengthen.

Investors should monitor commentary from the BoJ, with suggestions of aggressive policy moves to bolster the Yen likely to impact the USD/JPY pairing.

Meanwhile, US labor market and service sector data may provide Yen relief later in the session on Wednesday.

Will ADP Employment Number Signal a September Rate Cut?

Economists expect the ADP to report a 156k increase in employment in June after a 152k rise in May.

Weaker-than-expected figures could indicate a deteriorating labor market environment. A slower pace of hiring could affect wage growth and disposable income. Downward trends in disposable income could curb consumer spending and dampen demand-driven inflation.

For perspective, ADP employment change trended lower in April and May. However, the US Job Report sent more robust labor market signals, with nonfarm payrolls rebounding in May, limiting the influence of the ADP report on the Fed rate path.

Nevertheless, continuing jobless claims aligned more closely with the ADP numbers.

Will Continuing Jobless Claims to Trend Higher?

Economists forecast continuing jobless claims to increase from 1,839k to 1,841k in the week ending June 22.

Significantly, continuing jobless claims have not fallen since April. The less volatile numbers suggest a weakening labor market, aligned with the higher unemployment rate in May.

Considering the recent alignment, continuing jobless claim trends could give investors a better idea of unemployment rate movements.

Beyond the US labor market, US services sector PMI numbers may also impact investor expectations of a Fed rate cut.

US ISM Services PMI Another Fed Consideration

The services sector accounts for over 70% of the US economy and contributes to headline inflation.

Economists expect the ISM Services PMI to drop from 53.8 in May to 52.5 in June. Furthermore, economists predict the ISM Services Prices Index to fall from 58.1 to 57.8.

More modest service sector activity and weaker input price pressures could fuel investor bets on a September Fed rate cut.

However, investors should consider the ISM Services PMI data alongside the US labor market data.

The Fed may require softer service sector activity and a pullback in service sector prices. Weaker labor market conditions would also be considerations in their decision to cut interest rates in 2024.

Late in the US session, the FOMC Meeting Minutes may have a limited impact on the USD/JPY. Recent US economic indicators could give investors a more current picture of the Fed rate path.

Short-term Forecast: Bearish

USD/JPY trends remain hinged on intervention threats, BoJ commentary, US labor market data, and services sector data. Hotter-than-expected US data could sink investor bets on a September Fed rate cut. However, an intervention to bolster the Yen would offset the immediate effects of the numbers from the US.

Investors should stay vigilant as the Japanese Services PMI release approaches. Monitor real-time data and expert commentary to adjust trading strategies accordingly. Stay informed with our latest updates and insights to navigate the USD/JPY dynamics effectively.

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 break above the July 2 high of 161.745 could signal a return to the 162 handle.

The Japanese government, Bank of Japan, US labor market data, and services PMIs require consideration.

Conversely, a drop below the 160 handle could give the bears a run at the 50-day EMA.

The 14-day RSI at 75.74 shows a USD/JPY in overbought territory. Selling pressure may increase at the July 3 high of 161.745.