USD/JPY Forecast: Yen Eyes Household Spending and US Jobs Report for BoJ Decision

Can household spending give the Japanese Yen a new lease of life?

With the Bank of Japan on the fence for July, a USD/JPY drop below 160 may hinge on the US Jobs Report.

Household Spending to Steer the July Policy Decision for the Bank of Japan

On Friday, July 5, household spending figures from Japan could play a vital role in the July BoJ monetary policy decision.

Economists forecast household spending to increase by 0.5% in May, following a 1.2% decline in April.

In isolation, another unexpected fall in household spending could sink investor expectations of a July BoJ interest rate hike. The BoJ needs a pickup in household spending to drive demand-driven inflation and enable a rate hike.

For context, private consumption declined by 0.7% in Q1 2024, contributing to the 0.5% contraction in the Japanese economy.

Considering recent trends, private consumption may continue adversely impacting the economy. Household spending has fallen in five of the last seven months.

Could a weak Japanese Yen impact import prices, consumer prices, and household spending?

A Bank of Japan Rate Hike Could Bolster the Yen

The Bank of Japan could tighten monetary policy to bolster the Japanese Yen.

BoJ Deputy Governor Ryozo Himino recently addressed the effects of a weaker Yen 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.”

With the Japanese government holding back from intervening for the second time in as many months, the onus may be on the BoJ to target the weaker Yen.

What Do the Experts Think?

In June, Bruegel Senior Fellow Alicia Garcia Herrero saw quantitative tightening as more effective than interventions, saying:

“Bank of Japan to start quantitative tightening, which could support the Yen more than intervention.”

I asked her if the BoJ would risk cutting JGB purchases back more aggressively if US inflation numbers did not sink expectations of a September Fed rate cut, to which she replied,

“No choice, Yen beyond 160.”

US inflation numbers didn’t sink expectations of a September Fed rate cut, nor did they fuel expectations, leaving the USD/JPY at 161.

Considering interest rate differentials and carry trade appetite, numbers from Japan must improve. If all else fails, an aggressive cut to JGB purchases may do the job, but at what cost?

Meanwhile, the US Jobs Report will warrant investor attention later in the session on Friday.

Can the Jobs Report give the BoJ some breathing room?

Will US Wage Growth Satisfy Fed Chair Powell?

Fed Chair Powell spoke favorably about inflation progress toward the 2% target on Tuesday, July 2. However, the Fed Chair left investors with a focal point going into the Friday session. Powell highlighted that wage growth remained elevated.

Higher wages could increase disposable income and fuel consumer spending and demand-driven inflation.

The US Jobs Report could alleviate concerns about wage growth if average hourly earnings soften by more than expected.

Economists forecast average hourly earnings to increase 3.9% year-on-year in June after rising 4.1% in May.

For perspective, average hourly earnings rose 4.4% in January and trended lower to 4.0% in April before an uptick to 4.1% in May. A drop below 4.0% may not be enough to cement a September Fed rate hike. Both a rise in unemployment and a decline in the participation rate may be necessary to suggest a sustainable downward trend in wage growth.

Economists expect the US unemployment rate to remain steady at 4.0% in June.

With the US Jobs Report in focus, investors should also monitor FOMC Member reactions to the numbers.

Will there be any hard landing chatter after ISM Services PMI numbers on Wednesday?

For perspective, the ISM Services PMI fell to its lowest since May 2020 and fell below the 50 level for only the third time since the COVID-19 pandemic. The US economy contracted by 31.4% on an annualized basis in Q2 2020.

Notably, the services sector accounts for over 70% of the US economy.

Short-term Forecast: Bearish

USD/JPY trends remain hinged on household spending numbers from Japan and the US Jobs Report. A hotter-than-expected US Jobs Report could sink bets on a September Fed rate cut and leave the US dollar in the driving seat.

Investors should stay vigilant as the US Jobs Report looms. 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 effectively.

USD/JPY Price Action

Daily Chart

The USD/JPY sat comfortably above the 50-day and 200-day EMAs, affirming the bullish price signals.

A USD/JPY return to the July 3 high of 161.951 could signal a return to the 162 handle.

Household spending numbers, the Bank of Japan, and the US Jobs Report requires consideration.

Conversely, a break below the 160 handle could signal a fall to the 50-day EMA. A USD/JPY drop below the 50-day EMA could bring the 151.685 support level into play.

The 14-day RSI at 71.13 shows the USD/JPY sitting in overbought territory. Selling pressure may increase at the July 3 high of 161.951.