Japan Inflation Falls, USDJPY Still Bullish Long-term

USDJPY crashed 20 cents lower in the last two months, but the larger timeframe charts still paint a bullish trend for this pair. The decline in USD/JPY is largely due to diverging monetary policies between the Federal Reserve and the Bank of Japan. Fed Chair Jerome Powell’s comments at the Jackson Hole Symposium, combined with BOJ Governor Kazuo Ueda’s speech to Japan’s National Diet last Friday, have highlighted these differences. Despite this divergence, sellers are finding support around the 100 SMA (green) on the weekly chart, with the price holding above the 140 level.

USD/JPY Chart Weekly – Stalling at The 100 SMA

Bank of Japan’s Hawkish Shift

Governor Ueda indicated that the Bank of Japan might consider further interest rate hikes to combat persistently high inflation, suggesting that the monetary policy gap between Japan and the US will continue. The BOJ believes that maintaining a hawkish stance could strengthen the yen, which would make imports like gasoline cheaper, benefiting Japan’s economy.

Japan’s Inflation Outlook

Recent economic data suggest that inflation in Japan has remained strong, with the core consumer price index holding steady at 2.8% for the past three months, up from a year-to-date low of 2.2%. While inflation in Japan is still lower than in many other countries, the BOJ’s commitment to addressing price stability indicates that further policy tightening could be on the horizon. This focus on inflation management aims to support a relatively stronger yen and maintain economic stability. Early today we had the BOJ Core CPI inflation.

Bank of Japan Core CPI Inflation

• July BOJ Core CPI YoY came at 1.8% vs 2.1% expected
• June BOJ Core CPI was 2.1%

Japan Services PMI for July

• Services PMI for July: Also came in at 2.8%, compared to the expected 2.9%. This aligns with the Service PPI data, suggesting a similar trend of moderation in the services sector. The slight miss in expectations could indicate softer demand or adjustments in service pricing strategies.

Comments from Japan’s Finance Minister Suzuki

Finance Minister Suzuki highlighted that the exchange rate (FX) is influenced by a variety of factors beyond just monetary policies and interest rate differentials. Key points from his comments include:

• FX rates are also affected by geopolitical risks, market sentiment, and other variables.
• It’s challenging to predict how these factors will impact FX rates, suggesting that the future movement of the yen may be uncertain.
• The minister emphasized the importance of monitoring changes in US monetary policies and their effects through various channels, indicating a watchful stance on international economic developments and their implications for Japan’s economy.

USD/JPY Live Chart