USD/JPY Forecast: Rising Producer Prices in Japan Signal Rate Hike Potential

Japanese Producer Prices and the Bank of Japan

On Wednesday (June 12), producer price figures from Japan influenced buyer appetite for the USD/JPY.

Producer prices increased by 0.7% in May after advancing by 0.5% in April. Economists forecast producer prices to rise by 0.4%. Furthermore, producer prices increased 2.4% year-on-year in May after a rise of 1.1% in April. Economists expected producer prices to increase 2.0% year-on-year in May.

Producers increase prices in a higher-demand environment, passing costs onto consumers. The latest figures could signal an improving demand environment and a possible uptick in demand-driven inflationary pressures.

On Friday, the Bank of Japan may consider the producer price numbers. However, the BoJ may need more data points to begin meaningful discussions about interest rate hikes. Household spending slid by 1.2% in April after private consumption fell by 0.7% in Q1 2024. Downward trends in household spending could leave the BoJ in a holding pattern in the near term.

Furthermore, the BoJ also needs to consider the effects of a weaker Yen on import costs and producer prices. Higher producer prices stemming from a weaker Yen could raise consumer prices and impact household spending further.

In a recent speech, Bank of Japan Deputy Governor Ryozo Himino raised concerns about the Yen, 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.”

US Economic Calendar: The US CPI Report, FOMC Projections, and the Press Conference

Later in the session on Wednesday, the US CPI Report will attract investor attention.

Economists forecast the US annual inflation rate to remain at 3.4% in May. Furthermore, economists expect the core inflation rate to fall from 3.6% to 3.5% in May. Higher-than-expected numbers may sink investor bets on multiple 2024 Fed rate cuts.

A higher-for-longer Fed rate path may raise borrowing costs and reduce disposable income. Lower disposable income could curb consumer spending and dampen demand-driven inflation.

We anticipate heightened dollar sensitivity to the inflation figures, with the Fed delivering its interest rate decision late in the session. Economists predict the Fed will stand pat on Wednesday. However, uncertainty about the Fed rate path will give the FOMC Economic Projections and Press Conference more weight.

The recent US Jobs Report and the inflation numbers could lead to more hawkish economic projections and a US dollar breakout. Fed Chair Powell will also move the dial after the release of the projections.

Short-term Forecast

Near-term trends for the USD/JPY will depend on US inflation numbers, the FOMC Economic Projections, and the Bank of Japan. Hotter-than-expected US inflation numbers and more hawkish Economic Projections could tilt monetary policy divergence toward the US dollar. However, Bank of Japan forward guidance on Friday also needs consideration.

USD/JPY Price Action

Daily Chart

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

A USD/JPY breakout from 157.5 could support a move toward the 159 handle. If the USD/JPY moves through the 159 level, the bulls could take a run at the April 29 high of 160.209.

US inflation numbers, the FOMC Economic Projections, and the FOMC Press Conference need consideration.

Conversely, a USD/JPY fall through the 156.5 handle could bring the 50-day EMA into play. A break below the 50-day EMA could signal a fall toward the 151.685 support level.

The 14-day RSI at 56.89 suggests a USD/JPY return to the April 29 high of 160.209 before entering overbought territory.