USD/JPY Forecast: the Weak Yen, BoJ’s Potential Policy Moves, and US Retail Sales

Tertiary Industry Activity Index and the Japanese Economy

Tertiary Industry Activity Index numbers may influence investor appetite for the USD/JPY on Tuesday, July 16.

Economists expect the Index to rise by 0.1% in May after a 1.9% increase in April. Lower-than-expected numbers could signal weaker demand. The Index is a leading indicator of economic activity in Japan.

A weaker Japanese economy may affect the employment market and consumer confidence. If consumer confidence deteriorates, consumers could curb spending, dampening demand-driven inflation.

Household spending continues to impact the Japanese economy. In Q1 2024, the Japanese economy contracted by 0.5%, with private consumption falling by 0.7%. Household spending weakened further in Q2 2024, suggesting more economic pain for the Bank of Japan to manage.

The BoJ attributes lackluster consumer spending to the weak Yen and higher import prices. Upward trends in import prices can push consumer prices higher.

Is a Weaker Japanese Yen Impacting the Economy?

Bank of Japan Deputy Governor Ryozo Himino commented on the effects of the weak Yen on the economy. He said,

“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.”

After the Thursday, July 11, intervention, the BoJ could face pressure to tighten monetary policy. A tighter monetary policy could narrow dollar-Yen interest rate differentials and fuel buyer demand for the Yen.

What steps could the BoJ take to tighten monetary policy?

Economists think the BoJ may need to cut Japanese Government Bond (JGB) purchases aggressively and raise interest rates to have a lasting impact on rate differentials.

However, the BoJ must convince the markets that its policy measures are to stabilize prices and not to strengthen the Yen.

Experts Favor QT and Rate Hikes to Bolster the Yen

Some economists view quantitative tightening (QT) as crucial to rate differentials and Yen price trends. Nataxis Asia Pacific Chief Economist Alicia Garcia Herrero recently commented on QT, saying,

“The US Treasury yield is expected to fall as the Fed becomes more dovish on the back of softening inflation. […], the BoJ’s QT should help support the Yen possibly hovering around 150 against the USD toward the end of the year.”

The BoJ did not provide details on its QT plans from its June monetary policy meeting. The USD/JPY reversed Yen gains from the April/May interventions, rising from a May 3 low of 151.856 to a July 3 high of 161.951. The USD/JPY surge to 161.951 highlighted the importance of the BoJ’s monetary policy stance.

Meanwhile, US retail sales may also influence interest rate differentials.

US Retail Sales and the Fed Rate Path

Economists forecast US retail sales to stall in June after an increase of 0.1% in May.

An unexpected fall in retail sales could cement a September Fed rate cut. Downward trends in consumer spending may dampen demand-driven inflation and support a more dovish Fed rate path.

A sizeable fall in retail sales may reignite investor fears of a hard US landing. Private consumption contributes over 60% to the US economy.

Is the US economy heading for a recession?

Bloomberg TV Asia Pacific Chief Markets Editor David Ingles recently commented on the US economy. He said,

“Alas, looks like the US economy is cooling quicker than most analysts think. The Bloomberg US Economic Surprise Index has dropped to a 9-year low.”

Short-term Forecast: Bearish

USD/JPY trends depend on US retail sales and central bank commentary. Lower-than-expected US retail sales could signal September and December Fed rate cuts. Bank of Japan support for a July rate hike and cut to JGB purchases would also narrow interest rate differentials.

Investors should remain alert as the US retail sales loom. 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 sat above the 50-day and 200-day EMAs, sending bullish price signals.

A USD/JPY breakout from 158.500 would support a move toward 160. A return to 160 could give the bulls a run at the July 3 high of 161.951.

Central bank commentary and US retail sales require consideration.

Conversely, a break below the 50-day EMA could signal a drop toward the 155 handle.

The 14-day RSI at 42.82 indicates a USD/JPY drop to 155 before entering oversold territory.