USD/JPY Forecast: Q1 GDP Dip Puts Yen in Focus Amid Bank of Japan Rate Talks

The Japan Economy Contracted by 0.5% in Q1 2024

On Monday (June 10), GDP numbers for Q1 2024 influenced buyer appetite for the USD/JPY.

The economy contracted by 0.5% in Q1 2024 after stalling in Q4 2023. The finalized quarterly figures aligned with the first estimate numbers.

According to the Cabinet Office,

• Private consumption declined by 0.7% quarter-on-quarter in Q1 2024.
• The exports of goods and services fell by 5.1%.
• Year-on-year, the Japanese economy contracted by 1.8% versus a first estimated contraction of 2.0%.

The GDP numbers are significant, with the Bank of Japan on the calendar to deliver its interest rate decision on Friday (June 14).

Significantly, the downward trend in private consumption will attract the attention of the Bank of Japan. The Bank of Japan requires household spending and the services sector to fuel demand-driven inflation. Weak numbers from Q1 2024 preceded a 1.2% slide in household spending in April.

Private consumption and household spending trends suggest wage hikes are not translating into spending. With private consumption accounting for over 50% of the Japanese economy, concerns surrounding the effects of a weaker Yen could become the focal point.

Last week, BoJ Deputy Governor Ryozo Himino discussed the effects of Yen weakness on the economy, 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.”

On Friday (June 7), the US Jobs Report came in hotter than expected, sending the USD/JPY back toward 157. The US CPI Report could force the BoJ to hold more meaningful discussions on ways to bolster the Japanese Yen.

US Economic Calendar: US CPI Report and the FOMC Projections Loom

Investors should consider the looming US CPI Report. After better-than-expected labor market data on Friday, sticky inflation figures could give the FOMC hawks a stronger case to keep interest rates steady in 2024.

Average hourly earnings increased 4.1% year-on-year in May after rising 3.9% in April. Higher wages could increase disposable income. Upward trends in disposable income could fuel consumer spending and demand-driven inflation.

A higher-for-longer Fed rate path could raise borrowing costs and reduce disposable income.

Economists expect the Fed to leave interest rates at 5.50% on Wednesday. However, hopes of a September Fed rate hike remain despite the US Jobs Report.

Short-term Forecast

Near-term trends for the USD/JPY will hinge on the US CPI Report, the Fed, and the Bank of Japan. More hawkish FOMC economic projections could tilt monetary policy divergence toward the US dollar. However, a USD/JPY move toward 160 could incentivize the BoJ to start rate hike discussions.

USD/JPY Price Action

Daily Chart

The USD/JPY held above the 50-day and 200-day EMAs, sending bullish price trends.

A USD/JPY return to 157 could give the bulls a run at the 158 level. If the USD/JPY returns to the 158 handle, the April 29 high of 160.209 would come into play.

Bank of Japan commentary needs consideration after the Q1 2024 GDP Report.

Conversely, a USD/JPY fall through the 50-day EMA could signal a drop toward the 151.685 support level.

The 14-day RSI at 55.31 suggests a USD/JPY return to the April 29 high of 160.209 before entering overbought territory.