Japanese Yen Prices, Charts, and Analysis

• Japanese inflation drifts lower in December.
• The Quarterly Output Report next week is key going forward.

Japanese inflation cooled further in December with headline inflation falling to 2.6% from 2.8% in November, while core inflation fell to 2.3% from 2.5%, in line with market forecasts. Japanese price pressures are at their lowest level since mid-2022, but still above the 2% central bank target, and the Bank of Japan will need to see more signs of entrenched wage inflation before it considers tempering its multi-year ultra-loose monetary policy.

Next week the Bank of Japan will announce its latest monetary policy decision and the central bank is expected to leave all policy levers untouched. The BoJ will also release the first Quarterly Outlook for Economic Activity and Prices Report for 2024. This report presents the BoJ's outlook for developments in economic activity and prices, assesses upside and downside risks, and outlines its views on the future course of monetary policy. This report may be key in deciding the future path of the Japanese Yen.

The latest round of Fed pushback against what they perceive to be excessive US rate cut expectations have boosted the US dollar since the end of last year. The US dollar index has rallied by nearly 3% since December 28th, pushing it higher across the board. Over the same timeframe, USD/JPY has rallied from 140.28 to a current level of 148.05, a 6% move higher. USD/JPY is nearing levels where the Bank of Japan may start to ‘verbally intervene’ to try and stifle any move higher. The pair touched 150.91 on November 13th last year, just three pips off the July 2022 multi-decade high of 151.94. While the BoJ will hope that a weak Japanese Yen helps to import inflation, Japan’s trading partners will not be best pleased that their exports to Japan are being hurt by the lowly level of the Yen. The closer the USD/JPY gets to 150, the more likely that the Bank of Japan will start to talk about possible intervention.

USD/JPY Daily Price Chart

Retail trader data show 29.44% of traders are net-long with the ratio of traders short to long at 2.40 to 1.The number of traders net-long is 20.95% higher than yesterday and 0.40% higher from last week, while the number of traders net-short is 4.10% lower than yesterday and 12.37% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/JPY prices may continue to rise.

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