Bank of Japan (Japanese Yen) Analysis

• BoJ expected to remain on hold but aggressive bond purchases are to be tapered
• Inflation outlook has improved thanks to recent developments, retail sales recover
• Wage growth picks up in April
• The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

BoJ Expected to Remain on Hold but Aggressive Bond Purchases to be Tapered

The Bank of Japan (BoJ) is due to set policy in the early hours of Friday morning (UK time) and is expected to hold rates steady. There is however, an expectation that officials may reduce their appetite for government bond purchases, allowing yields to move more freely above 1% in the next phase of its plans to normalise policy. Japanese Media company Nikkei has been a reliable source for BoJ news and yesterday reported that the Bank will consider gradually reducing its Japanese government bond holdings. For now, it remains a possibility that monthly purchases could decline from 6 trillion yen to 5 trillion yen but the details of any such decision will be made clearer on Friday.

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Inflation Outlook has Improved Thanks to Recent Developments

A virtuous relationship between wages and prices is one of the prerequisites for further rate hikes but officials will most likely want to see more progress on this front. All three measures of Japanese CPI have turned lower on a year-on-year basis but recent developments from the monthly data reveals an encouraging uptick. CPI however, remains above the 2% marker identified by the BoJ and while that remains the case, conversations around commensurate wage growth is likely to continue. Policy setters will also be encouraged by the recovery in retail sales, although this data point can be very volatile and other indications of an uptick in local demand will likely be relied on for a better picture of consumer strength.

Japanese Inflation Profile

Source: Refinitiv, prepared by Richard Snow

Japanese Wages Recovered in April after Disappointing in March

Japanese wages rose in April to 2.1% beating estimates of 1.7% and smashing the prior reading of 1%. The Bank is trying to guide inflation and wages higher to meet the threshold for further rate hikes. Progress has been slow and hence officials are likely to insist on waiting for future data before making any alterations to interest rates. Both wages and inflation appear to have formed cycle peaks and the Bank of Japan will be looking to reignite both readings sooner than later.

Source: Refinitiv, prepared by Richard Snow

USD/JPY Fails to Capitalise on Weaker US CPI as Levels Remain Elevated

USD/JPY initially dropped after US inflation data suggested the disinflationary process was back underway. Most of the yen’s gains were erased hours later after the Fed removed two of their three anticipated rate cuts for 2024 at its June meeting.

Weekly USD/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 has acted as dynamic support. USD/JPY could drift higher give the Fed envisions the rate differential between the two nations is likely to remain at the current wide levels for some time to come still.

Support rests 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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