Inflation and Wages Leave more to be desired

Bank of Japan Analysis (Japanese Yen).

• The BoJ is expected to remain on hold, but aggressive bond purchases need to be scaled back
• The inflation outlook has improved due to recent developments, retail sales are recovering
• Wage growth will accelerate in April
• The analysis in this article uses chart patterns and a key support and resistance levels. For more information, visit our comprehensive educational library

The BoJ is expected to remain on hold, but aggressive bond purchases will be limited

The Bank of Japan (BoJ) is due to set policy early Friday morning (UK time) and is expected to keep rates steady. But there are expectations that officials may reduce their appetite for government bond purchases, allowing yields to move more freely above 1% in the next phase of their plans to normalize policy. Japanese media company Nikkei has been a reliable source of BoJ news and announced yesterday that the bank will consider gradually reducing its holdings of Japanese government bonds. For now, the possibility remains that monthly purchases could drop from ¥6 trillion to ¥5 trillion, but details of any such decision will become clearer on Friday.

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The inflation outlook has improved due to recent developments

A decent relationship between wages and prices is one prerequisite for further rate hikes, but officials will most likely want to see more progress in this area. All three measures of Japan’s CPI declined year-on-year, but recent developments from monthly data reveal an encouraging uptick. However, CPI remains above the 2% benchmark set by the BoJ, and even if it remains that way, talks about proportional wage growth are likely to continue. Policymakers will also be encouraged by a recovery in retail sales, although this figure can be highly volatile and will likely rely on further signs of local demand growth to get a better idea of ​​consumer strength.

Japan’s inflation profile

Source: Refinitiv, processed Richard Snow

Japanese wages rebounded in April after disappointing in March

Japanese wages rose 2.1% in April, beating estimates of 1.7% and beating the previous estimate of 1%. The bank is trying to steer inflation and wages higher to meet the threshold for further rate hikes. Progress has been slow, so officials are likely to insist on waiting for future data before making any interest rate changes. Both wages and inflation appear to have formed cycle tops, and the Bank of Japan will be looking to restore both readings sooner rather than later.

Source: Refinitiv, processed Richard Snow

USD/JPY fails to take advantage of weaker US CPI as levels remain elevated

USD/JPY initially fell after US inflation data suggested that the disinflation process is back on track. Most of the yen’s gains were erased hours later after the Fed removed two of the three expected rate cuts for 2024 at its June meeting.

Weekly American dollar/JPY chart

Source: TradingView, prepared by Richard Snow

The pair continues to trade near the recent swing high, well above the 50-day simple moving average (SMA), which acted as dynamic support. USD/JPY could move higher if the Fed imagines that the rate differential between the two countries is likely to remain at current broad levels for some time to come.

Support lies at the 50 SMA and the 155.00 marker, with resistance appearing at the May swing high at 157.70.

USD/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX