Japanese Yen Forecast: Inflation and Services PMI Spotlight the BoJ

USD/JPY: Inflation Data Puts Spotlight on BoJ Policy Path

Japanese inflation numbers fueled speculation about a Bank of Japan rate hike in early trading on Friday, October 24, influencing USD/JPY price outlook.

Inflation Numbers and Market Reaction

The annual inflation rate increased from 2.7% in August to 2.9% in September, while core inflation rose from 2.7% to 2.8%. Crucially, the so-called ‘core-core’ inflation rate eased from 3.3% to 3.0%. Economists had expected the core-core inflation rate to fall modestly to 3.2%.

Despite easing core-core inflation, overall inflation remains well above the BoJ’s target, maintaining pressure for policy tightening.

Political Shift and Fiscal Stimulus Expectations

September’s inflation figures came after LDP leader Sanae Takaichi became Japan’s first woman prime minister on Tuesday, October 21. Sanae Takaichi is expected to support an ultra-loose BoJ monetary policy stance to boost the economy.

Significantly, the LDP-led coalition government is reportedly planning a stimulus package of more than $90 billion to support households struggling with high prices. Stimulus plans and expectations that Takaichi will influence the BoJ’s rate path tempered market reaction to the September inflation data.

Policy Outlook Ahead of BoJ Meeting

USD/JPY moved from 152.626 to 152.672 before dropping to a low of 152.575 following the release of the data. Notably, the USD/JPY pair has rallied 3.23% in October as traders considered Prime Minister Takaichi’s stance on monetary and fiscal policy.

However, hopes for a December BoJ rate hike remain alive despite Takaichi’s election victory. The next BoJ interest rate decision is on October 30, which will provide insights into policymakers’ views on Prime Minister Takaichi’s fiscal stimulus plans and the Bank’s policy outlook.

Hawkish Voices at the BoJ

This week, board member Takata Hajime supported rate hikes ahead of Prime Minister Takaichi’s election win, reportedly stating:

“I believe that now is a prime opportunity to raise the policy interest rate. The once deeply entrenched norm has waned in Japan, that the price stability target has been almost achieved.”

Notably, the BoJ must weigh the benefits of a weaker yen boosting exports and the negative effects of higher import costs on households.

On Wednesday, October 22, former BoJ board member Eiji Maeda hinted at a December or January rate hike, stating:

“Moving too slowly in policy normalization would hurt people’s livelihoods by weakening the yen and accelerating inflation.”

PMI Data and Economic Momentum

As the dust settles from the inflation report, traders will now turn their attention to flash private sector PMI numbers.

The market focus will likely be on the Services PMI, given that the sector contributes over 70% to Japan’s GDP. Economists forecast the S&P Global Services PMI to drop from 53.3 in September to 53.0 in October.

A sharper drop in the headline PMI could signal a loss of economic momentum, potentially tempering bets on a BoJ rate hike. A more dovish BoJ policy stance may weigh on the Japanese yen. Conversely, a higher PMI reading could boost expectations of a BoJ rate hike.

However, traders should also consider input and output prices and the employment sub-components. Softer wage growth, weaker output prices, and job cuts would support a delay to monetary policy tightening. On the other hand, higher wages, stronger output prices, and rising jobs would suggest a more hawkish rate path.

US Services PMI, Consumer Sentiment, and the USD/JPY Outlook

Across the Pacific, US S&P Global Services PMI and Michigan Consumer Sentiment Index numbers will fill an economic data void as the US government shutdown enters day 24.

Economists forecast the Services PMI to fall from 54.2 in September to 53.5 in October.

A sharper drop toward the 50 neutral level would signal a marked loss of economic momentum, given that services contribute around 80% to US GDP. Additionally, traders should consider the employment and prices sub-components. Lower prices, job cuts, and slower services sector activity would support a more dovish Fed rate path, pushing USD/JPY toward 150.

Conversely, a pickup in services sector activity, higher prices, and rising employment could temper bets on multiple Fed rate cuts. A less dovish Fed rate path may send USD/JPY toward the August high of 153.274.

While the services sector data will be key, the Michigan Consumer Sentiment Index could also move the dial. According to preliminary data, the Michigan Consumer Sentiment Index slipped from 55.1 in September to 55.0 in October.

A downward revision could signal a pullback in consumer spending, dampening demand-driven inflation. A softer inflation outlook would support multiple Fed rate cuts and a USD/JPY fall toward 150. On the other hand, a higher reading could challenge bets on multiple Fed rate cuts, sending the pair toward 153.274. While the consumer sentiment figures will draw interest, the Services PMI will have more impact on the USD/JPY pair.

USD/JPY Scenarios: Services PMI Data, BoJ Uncertainty, and Dovish Fed Bets

Market scenarios for USD/JPY will hinge on central bank rhetoric and trade headlines.

• Bearish USD/JPY Scenario: hawkish BoJ commentary, stronger PMI data, or escalating US-China trade tensions could push USD/JPY toward 150.
• Bullish USD/JPY Scenario: dovish BoJ commentary, weaker PMI data, or easing US-China trade tensions could send USD/JPY toward 153.274.

Read the full USD/JPY forecast, including chart setups and trade ideas.

Key Market Drivers to Watch Today:

• BoJ commentary.
• Private Sector PMI data.
• US Senate vote.
• US-China trade headlines.

For more in-depth analysis, review today’s USD/JPY trading setups in our latest reports and consult the economic calendar.