Japanese Data and Politics Helping Keep USDJPY Down

Since July, the USD has been under pressure, contributing to the ongoing USD/JPY downturn. Last week’s political events in Japan didn’t provide much relief for the pair, as it slid sharply again on Friday, dropping nearly 4.5 cents from its recent peak. A key driver of this movement was the continued decline in the US PCE inflation rate, which weakened the USD further.

Political Developments and Yen Strength

The race for Japan’s prime minister has also played a role in strengthening the JPY. The victory of Shigeru Ishiba, a former defense minister, bolstered the yen, with the USD/JPY pair closing around 142.17 at the end of Friday’s US session. Ishiba’s win is significant because his opponent was opposed to further rate hikes by the Bank of Japan (BOJ). Ishiba’s election has fueled market speculation that his leadership could pave the way for more BOJ rate hikes, driving the yen’s strength.

Market Expectations and Fed Outlook

At the same time, the US PCE inflation data, the Fed’s preferred inflation measure, showed another decline, increasing the chances of a more dovish stance by the Federal Reserve. The report has heightened expectations that the Fed may lower interest rates by as much as 50 basis points at its meeting in November, as US inflationary pressures continue to cool. This outlook has further weakened the USD, adding downward pressure on the USD/JPY. Overall, while retail sales data exceeded expectations, industrial production showed a sharp downturn, suggesting a mixed economic picture for Japan.

Japan Retail Sales and Industrial Production – August

• Retail Sales (Year-over-Year):

  • August: +2.8% (vs. +2.3% expected)
  • July: +2.7%
  • This marks a slight improvement in retail sales growth, signaling continued consumer spending resilience.

• Retail Sales (Month-over-Month):

  • August: +0.8% (vs. +0.2% prior)
  • The sharp increase in month-on-month sales indicates a stronger short-term consumer demand.

• Industrial Production (Month-over-Month):

  • August: -3.3% (vs. -0.9% expected)
  • July: +3.1%
  • Industrial production saw a significant contraction in August, reversing the strong growth from July and falling well short of expectations.

• Industrial Production (Year-over-Year):

  • August: -4.9% (vs. +2.9% expected)
  • The yearly figure highlights a steep decline in output, reflecting ongoing challenges in Japan’s industrial sector.

USD/JPY Live Chart