USD/JPY Forecast: Lower on BOJ Policy Outlook, Chinese Factory Concerns

Highlights

• Dollar/Yen lower due to Chinese factory activity decline.
• BOJ monitoring currency market and considering action.
• Wage growth and BOJ’s ultra-loose policy discussed for rate hike prospects.

Dollar/Yen Falls Amid Chinese Factory Concerns, BOJ Monitoring

The Dollar/Yen is edging lower on Wednesday for a second consecutive day. This is due to an unexpected decline in Chinese factory activity. This has raised concerns about China’s recovery from the pandemic, causing traders to seek the safe-haven Japanese Yen.

Moreover, Japan’s top currency diplomat announced on Tuesday that they will closely monitor the movements in the currency market and take necessary action as deemed appropriate. This comes after financial authorities convened in response to the Japanese yen weakening to its lowest level in six months against the US dollar.

In the past year, investors have been closely following the monetary policy of the Bank of Japan (BOJ), as they intervened to strengthen the yen last year. This year, the focus has shifted to whether and when the BOJ will make any adjustments to its ultra-loose monetary policy stance.

At 07:07 GMT, the USD/JPY is trading 139.596, down 0.187 or -0.13%. On Tuesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $66.59, up $0.38 or +0.57%.

Watanabe: Wage Growth Key for BOJ’s Rates

In other news, According to Tsutomu Watanabe, an academic who took part in a government panel, the Bank of Japan (BOJ) might consider increasing short-term interest rates early next year if there is sustained wage growth. Watanabe argues that inflation will remain high as companies gain confidence in raising prices without deterring consumers. However, he recognizes the need for the BOJ to maintain its ultra-loose policy due to uncertainties surrounding future wage hikes.

Watanabe proposes the removal of the 0% target for the 10-year bond yield before implementing any increases in short-term rates. He welcomes the BOJ’s emphasis on wage growth. While suggesting that clearer guidance should be provided regarding the specific data used to determine the conclusion of the ultra-loose policy.

It is important to note that Watanabe’s insights come from his academic perspective, and his recommendations are based on his understanding of the current economic situation. The BOJ’s decision-making process is influenced by multiple factors, and any adjustments to interest rates or policy measures will depend on a thorough assessment of economic conditions.

Overall, Watanabe’s view adds to the ongoing discussion around the BOJ’s monetary policy and highlights the importance of sustained wage growth as a key factor in determining the timing of potential rate hikes and the normalization of policy measures.

Technical Analysis

The USD/JPY is currently trading on the weak side of 140.498 (R2). A sustained move under this level will signal that the selling pressure is getting stronger. This could lead to a near-term test of 138.452 (R1)

A sustained move over 140.498 (R2) will signal the return of buyers. If this is able to generate enough upside momentum then we could see a near-term acceleration into 144.432 (R3).

Resistance & Support Levels