The Japanese yen is facing downward pressure in spite of a recent increase in the National Consumer Price Index (CPI). The USD/JPY currency pair is well-supported by Japan’s deteriorating fiscal position. Prime Minister Sanae Takaichi’s blanks checks for Sea Godzilla is blowing it all out of the water. The markets are waiting with bated breath for the Bank of Japan’s (BoJ) next policy installment. At the same time, the yen’s trajectory reflects a complicated interaction between domestic financial conditions and global economic expectations.
Japan’s public debt are a whopping 250% of its GDP, the highest in the world. Such a shocking number calls into question the sustainability of Japan’s fiscal plans, especially given the ongoing inflationary pressures. Growth has been considerably weaker than the headline inflation rate, which remains stubbornly above the Bank of Japan’s 2% target. In November, the National CPI rose by 2.9% year-on-year, down from 3.0% in October. The one measure that effectively discounts inflation’s wild card, the core CPI, which excludes the often-volatile food and energy sectors, rose to 2.6% last month.
Even with these heavy inflationary numbers, the USD/JPY pair seems set to end the week almost flat. This stability comes against a backdrop of speculation over future interest rate hikes by the US Federal Reserve. Currently market participants expect the Fed to start cutting rates soon. Such cuts would limit meaningful strengthening of the US dollar, and thereby USD/JPY.
Technical analysis indicates that a firm break under the 154.35 could trigger hefty selling interest. In the immediate term, this move can push the USDJPY lower towards the 154.30 area. The 100-hour Simple Moving Average (SMA) is so far positioned as a key support barrier against the quoted pair. This moving average, now situated around 155.30, is expected to provide protection against immediate downside risks, particularly as traders eye the psychological threshold of 155.00.
The continued strength after the break of the 156.00 level provides an excellent opportunity for USD/JPY bulls. If this innovation succeeds, it would help propel a series of additional market advancements. Oscillators on both hourly and daily charts remain firmly in positive territory. This could cause spot prices to retest the monthly high near the 157.00 psychological mark. This possible upward trajectory depends on future economic data, most notably from the US. Watch for the June Existing Home Sales data and the likely June upward revisions to the University of Michigan Consumer Sentiment Index.
The prospect of an upcoming interest rate increase by the BoJ is boosting sentiment toward the yen, as well. If the central bank opens the door to changing its extremely accommodative monetary policy, even better for the JPY. This would be to the great benefit of its US counterpart. As these dynamics play out, traders are on the watch. They are looking out for volatility that could be caused by geopolitical events or surprise releases of major economic data.