Bank of Japan (Japanese Yen) Analysis
- The Bank of Japan is expected to keep policy on hold but will gradually tapering its aggressive bond purchases
- Recent developments have improved the inflation outlook and retail sales have recovered.
- Wage growth accelerates in April
- In this article, the analysis Chart Patterns and key Support and Resistance level. For more information, see our comprehensive Education Library
The Bank of Japan is expected to keep policy on hold but scale back aggressive bond purchases
The Bank of Japan (BoJ) is expected to decide policy early on Friday morning (UK time) and keep interest rates unchanged. However, the next stage of its policy normalization plan is expected to see authorities reduce their appetite for buying government bonds, allowing yields to float more freely above 1%. Japanese media company Nikkei, a reliable source of information on the BoJ, reported yesterday that the bank will consider gradually reducing its holdings of Japanese government bonds. For now, it remains possible that monthly purchases could be reduced from 6 trillion yen to 5 trillion yen, but the details of such a decision are likely to become clear on Friday.
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Recent developments improve inflation outlook
A favorable relationship between wages and prices is one of the prerequisites for further interest rate hikes, but authorities will likely want to see more progress in this regard. All three indicators of Japan’s Consumer Price Index (CPI) are declining year-on-year, but recent trends in monthly data point to an encouraging uptick. However, the CPI remains above the 2% threshold set by the Bank of Japan, and as long as this situation persists, the debate over a reasonable wage increase will continue. Policymakers will also be encouraged by the recovery in retail sales, but this data can be very volatile and they will rely on other signs of rising domestic demand to get a more accurate picture of consumer strength.
Japan’s Inflation Profile
Source: Refinitiv, compiled by Richard Snow
Japan wages disappoint in March but bounce back in April
Japan’s wages rose 2.1% in April, beating the expected 1.7% and well above the previous 1%. The Bank of Japan is trying to steer inflation and wage growth to meet the threshold for further interest rate hikes. Progress has been slow, so officials are likely to insist on waiting for future data before making any rate changes. Both wages and inflation appear to have formed cycle peaks, and the Bank of Japan is looking to reinvigorate both indicators sooner or later.
Source: Refinitiv, compiled by Richard Snow
USD/JPY fails to capitalize on US CPI decline, remains high
USD/JPY initially fell after US inflation data suggested the deflation process had resumed, with most of the yen’s gains disappearing within hours after the Fed reversed two of three interest rate cuts planned for 2024 at its June meeting.
Every week USD/JPY Chart
Source: TradingView. Creator: Richard Snow
The pair continues to trade near recent highs well above the 50-day Simple Moving Average (SMA), which has acted as dynamic support. USD/JPY could rise as the Fed expects the interest rate differential between the two countries to remain at its current wide level for some time to come.
Support lies at the 50 SMA and the 155.00 marker, while resistance lies at the May swing high at 157.70.
USD/JPY daily chart
Source: TradingView. Creator: Richard Snow
Learn more about trading USD/JPY, a currency pair essential to international trade and well known as a facilitator of the carry trade.
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How to trade USD/JPY
— Article by Richard Snow from DailyFX.com
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