BoJ Preview: Inflation and wages leave more to be desired

Analysis from the Bank of Japan (Japanese Yen).

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

The BoJ is expected to remain on hold, but aggressive bond purchases will be tapered

The Bank of Japan (BoJ) will set its policy early on Friday morning (UK time) and is expected to keep interest rates stable. However, there are expectations that officials may reduce their appetite for government bond purchases, allowing yields to move more freely above 1% in the next phase of its policy normalization plans. Japanese media company Nikkei is a reliable source for BoJ news and reported yesterday that the Bank will consider gradually reducing its holdings of Japanese government bonds. For now, it remains a possibility that monthly purchases could drop from 6 trillion yen to 5 trillion yen, but the details of such a decision will be made clearer on Friday.

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The inflation outlook has improved thanks to recent developments

A virtuous relationship between wages and prices is one of the conditions for further interest rate increases, but officials will most likely want to see more progress on this front. All three measures of Japan’s CPI have moved lower year-on-year, but recent developments in monthly data show an encouraging increase. However, the CPI remains above the 2% limit set by the BoJ and while that remains the case, talk of commensurate wage growth is likely to continue. Policymakers will also be encouraged by the recovery in retail sales, although this data could be highly volatile and other indications of a rebound in local demand are likely to be used to get a better sense of consumer strength.

Japan’s inflation profile

Source: Refinitiv, prepared by Richard Snow

Japanese wages recovered in April after disappointing in March

Japanese wages rose to 2.1% in April, beating expectations of 1.7% and the previous 1%. The Bank is trying to push inflation and wages higher to meet the threshold for further interest rate increases. Progress has been slow, so officials will likely continue to wait for future data before making any changes to interest rates. Both wages and inflation appear to have formed cycle peaks and the Bank of Japan will look to revive both measures sooner rather than later.

Source: Refinitiv, prepared by Richard Snow

USD/JPY fails to benefit from weaker US CPI as levels remain elevated

USD/JPY initially fell after US inflation data suggested the disinflationary process had resumed. Most of the yen’s gains were wiped out hours later after the Fed withdrew two of three expected rate cuts for 2024 at its June meeting.

Weekly U.S. dollar/JPY chart

Source: TradingView, prepared by Richard Snow

The pair continues to trade near its recent swing high, well above the 50-day Simple Moving Average (SMA), which has served as dynamic support. USD/JPY could move higher as the Fed expects that the interest rate spread between the two countries is likely to remain at current broad levels for some time to come.

Support rests at the 50 SMA and the 155.00 mark, while resistance appears at the May swing high at 157.70.

USD/JPY daily chart

Source: TradingView, prepared by Richard Snow

Learn the ins and outs of trading USD/JPY – a pair crucial to international trading and a well-known facilitator of the carry trade

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX