USD/JPY Forecast: Wage Growth Trends and BoJ Rate Hike Prospects

Can wage growth trends signal a pickup in household spending? An unexpected jump in wage growth could be pivotal to a July Bank of Japan rate hike and a USD/JPY return to sub-160.

Wage Growth, Household Spending, and the Japanese Economy

On Monday, July 8, average cash earnings figures from Japan may influence buyer demand for the USD/JPY.

Economists forecast average cash earnings to increase 2.1% year-on-year in May after rising 2.1% in April.

An unexpected rise in average cash earnings could raise investor bets on a July BoJ interest rate hike. Upward trends in wage growth may fuel consumer spending and demand-driven inflation.

For context, average cash earnings trended upwards since Q4 2023, suggesting an improving private consumption environment.

However, higher wages have failed to translate into household spending, adversely affecting the Japanese economy.

Household spending unexpectedly fell by 0.3% in May after sliding by 1.2% in April. The numbers suggest another poor quarter for the Japanese economy.

For perspective, the Japanese economy contracted by 0.5% in Q1 2024, with private consumption down by 0.7%.

Significantly, the economy contracted for the third consecutive quarter and could face a fourth quarterly contraction.

Is the weakness of the Japanese Yen affecting private consumption and the Japanese economy?

In June, Bank of Japan Deputy Governor Ryozo Himino discussed the impact 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.”

Notably, the BoJ has remained silent on monetary policy goals after the USD/JPY spiked at a July 3 high of $161.951.

Meanwhile, US inflation remains a focal point as investors raise bets on a September Fed rate cut.

Will US consumer inflation expectations draw the interest of the Fed?

US Consumer Inflation Expectations and the Fed Rate Path

Later in the session on Monday, consumer inflation expectation numbers could increase investor expectations of a September Fed rate cut.

Economists forecast consumer inflation expectations to ease from 3.2% in May to 3.0% in June.

The Fed considers consumer inflation expectations a predictor of future inflation trends. Expectations of softer inflation could signal a pullback in consumer spending on easing fear of higher prices in the future. Downward consumer spending trends may dampen demand-driven inflation and allow the Fed to cut interest rates.

For context, consumer inflation expectations trended downward until an unexpected upswing in April. Consumer inflation expectations peaked at 6.8% in June 2022 before dropping below 4% in May 2023.

The numbers could prove significant with Fed Chair Powell giving testimony on Capitol Hill on Tuesday, July 9, and the crucial US CPI Report out on Thursday, July 11.

Will Fed Chair Powell address consumer inflation expectations in his testimony or wait for the CPI Report?

Short-term Forecast: Bearish

USD/JPY trends will hinge on wage growth trends from Japan, the US CPI Report, and central bank commentary. Better-than-expected wage growth numbers from Japan could signal a more hawkish BoJ rate path and drive buyer demand for the Yen.

Nevertheless, a larger-than-expected fall in US consumer inflation expectations could raise bets on a September Fed rate cut. Diverging monetary policy maneuvers could give the USD/JPY a run at 150.

Investors should remain vigilant as the US inflation numbers loom. Monitor real-time data and expert commentary to adjust your trading strategies accordingly. Stay informed with our latest updates and insights to navigate the USD/JPY dynamics.

USD/JPY Price Action

Daily Chart

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

A USD/JPY break above the July 3 high of 161.951 could give the bulls a run at the 162 handle.

Wage growth numbers from Japan and US consumer inflation expectations require consideration.

Conversely, a drop below the 160 handle could bring the 50-day EMA into play. A USD/JPY fall through the 50-day EMA could give the bears a run at the 155 handle.

The 14-day RSI at 65.50 suggests a USD/JPY return to 161 before entering overbought territory.