Neither expectations of a reduction in quantitative easing (QE) nor rising Japanese bond yields are helping USDJPY bears. Their rivals are encouraged by the fact that the US economy is still strong and the rate differential remains wide. Let’s talk about this topic and make a trading plan.
Weekly fundamental forecast for Japanese yen
Do not believe the words; believe the deeds. The Japanese yen is doing just the opposite. Neither a rise in wages at the fastest pace since 1994, nor a rise in government bond yields to the highest level since 2011, nor the median forecast of Reuters experts that USDJPY will fall to 145 in 12 months is inspiring bears to counterattack. On the contrary, the Ministry of Finance’s cautious approach to future FX interventions and BoJ representative Toyoaki Nakamura’s statement on the need to maintain ultra-loose monetary policy were the catalysts for the pair’s rally.
Prior to the March overnight rate hike, the BoJ had talked about expectations for an agreement between employers and unions on wage growth. In the end, the parties shook hands, and the BoJ abandoned its negative interest rate policy. Usually, contract terms are fulfilled from April to August. By the end of the second month of spring, companies are expected to meet 40% of their obligations; by the end of July, this figure rises to 80%. Not surprisingly, Japan’s minimum wage rose by 2.3% y/y in April, the fastest increase since 1994.
Wage growth in Japan
Source: Bloomberg.
Thus, the BoJ has a strong argument for continuing the normalization cycle of monetary policy. Furthermore, a Bloomberg insider says the decision to reduce asset purchases from the current ¥6 trillion will be made as early as July. While a specific number is unlikely, investors expect QE to fall to ¥5 trillion. In April, the BoJ bought ¥4.5 trillion worth of securities, the smallest amount since March 2013.
BoJ’s government bond holdings
Source: Bloomberg.
The withdrawal of the largest buyer from the market leads to a price fall and an increase in bond yields. The 10-year government bond yield has exceeded 1.1% for the first time since 2011. Technically, the narrowing spread between US and Japanese bond yields should have led to a decline in USDJPY. However, there are at least two reasons why this is not happening. First, the spread remains wide, allowing the difference to be played with the yen and the US dollar. Second, strong statistics on the US economy continue to widen the yield differential.
Here, we are talking about the US employment data for May, which has become a cold shower for USDJPY bears. The 272K job growth increases the likelihood that the FOMC’s revised projections will include only one act of monetary expansion in 2024. If so, investors will massively turn to the US dollar again.
Weekly USDJPY trading plan
Anchored inflation in the US, revised FOMC forecasts on the federal funds rate, Jerome Powell’s hawkish tone, and lack of surprises from the Bank of Japan in the form of an overnight rate hike on June 14 can drag the USDJPY pair to the upper boundary of the 153-160 consolidation range. One can buy the instrument after the price breaks through the resistance 157.7.
Price chart of USDJPY in real time mode
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