USD/JPY Forecast: Inflation Rate of 2.8% to Influence BoJ Policy Goals

Economic Indicators: Japan Inflation

On Friday, July 19, inflation numbers from Japan put the focus on the USD/JPY.

The annual inflation rate remained steady at 2.8% in June.

Furthermore, the core inflation rate rose from 2.5% in May to 2.6% in June.

The inflation figures could raise investor expectations of a July Bank of Japan rate hike and reduction in Japanese Government Bond (JGB) purchases.

With inflation in focus, investors should monitor BoJ Board Member reactions to the numbers.

Comments relating to interest rate hikes and JGB purchases need consideration.

Inflation and Implications for the Bank of Japan

In the June monetary policy statement, the BoJ stated it would disclose plans to cut JGB purchases in the July meeting. Since June, the BoJ has been silent on how much it plans to reduce JGB purchases.

An aggressive cut to JGB purchases could narrow interest rate differentials in favor of the Yen. However, economists think the BoJ must also raise interest rates to sustainably narrow interest rate differentials and bolster the Yen.

Higher core inflation would support a more aggressive rate hike. Inflation could also signal a larger cut to JGB purchases. Barring a Fed U-Turn on plans to cut interest rates, BoJ policy moves could send the USD/JPY below 150.

Conversely, a modest cut to JGB purchases and no rate hike could disappoint and fuel a pre-Fed USD/JPY return to 160.

For the BoJ, the issue extends beyond price stability. Household spending trends have reflected the effects of the weak Yen on import costs and consumer prices. After multiple interventions since April, the BoJ could face extra pressure to address price stability and the Yen’s weakness.

Broader Considerations for the Japanese Economy

Bank of Japan Deputy Governor Ryozo Himino recently commented on the effects of the Yen’s weakness 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.”

S&P Global Market Intelligence Associate Director Jinyi Pan also observed the effects of the weak Yen on the private sector, 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.”

Notably, narrowing profit margins may affect the labor market and wage growth. Softer wage growth could reduce household spending. In Q1 2024, private consumption fell by 0.7%, impacting the economy.

After considering the inflation numbers from Japan, FOMC Member speeches could also influence near-term USD/JPY trends.

Fed Forward Guidance

FOMC Members John Williams and Raphael Bostic are on the calendar to speak on Friday.

Investors should consider reactions to recent US inflation and labor market data. Support for a September Fed rate cut may fuel speculation about a December interest rate cut.

On Wednesday, NY Fed President John Williams poured cold water on a July rate cut but indicated a possible September cut. A more decisive stance toward September could reduce buyer demand for the US dollar.

However, comments from Raphael Bostic may have more impact on sentiment toward the Fed rate path. The Atlanta Fed President has not spoken since Fed Chair Powell sent September Fed rate cut signals during testimony on Capitol Hill.

Short-term Forecast: Bearish

USD/JPY trends could hinge on July services PMI numbers on July 24 and the US Personal Income and Outlays Report on July 26. A pickup in Japan’s services sector may raise investor expectations of a July 31 BoJ interest rate hike and cut to JGB purchases

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

The USD/JPY could drop below 150 on a narrowing to interest rate differentials in favor of the Yen.

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 remained below the 50-day EMA while sitting comfortably above the 200-day EMA. The EMAs affirmed the bearish near-term but bullish longer-term price signals.

A USD/JPY move above the 50-day EMA could signal a return to 160. A break above 160 could support a move to the July 3 high of 161.951.

Bank of Japan and Fed commentary require consideration on Friday.

Conversely, a drop below the 155 handle could give the bears a run at the 200-day EMA and the 151.685 support level.

The 14-day RSI at 41.89 suggests a USD/JPY break below 155 before entering oversold territory.