Traders braced for USD/JPY volatility in early trading on Monday, November 17, after Japanese GDP data dampened bets on a Bank of Japan rate hike. Last week, the pair climbed to a nine-month high of $155.044. Rising uncertainty about a BoJ rate hike in December clashed with fading expectations of a Fed rate cut.
Crucially, USD/JPY briefly entered 2024’s 155-160 ‘intervention zone’ before easing back. Prime Minister Sanae Takaichi’s fiscal stimulus plans and support for ultra-loose BoJ monetary policy continued to weigh on the yen.
Since Prime Minister Takaichi won the Liberal Democratic Party election, USD/JPY has soared 3.4% to 154.52. Notably, Japanese government yen intervention threats helped cap gains so far in the fourth quarter.
Japan’s Economy Contracts Sharply
With uncertainty around the BoJ’s rate path intensifying, the latest third-quarter GDP report added another layer of weakness for the yen.
The economy contracted by 0.4% quarter-on-quarter (QoQ) in the third quarter after expanding 0.6% QoQ in the previous quarter. Softer private consumption and weakening external demand contributed to the loss of economic momentum. The Japanese Cabinet Office reported:
- External demand fell 0.2% QoQ in Q3, after rising 0.2% in Q2. For context, Japan’s trade-to-GDP ratio sits above 45%, exposing Japanese exporters to US tariffs and weakening global demand.
- Private consumption slowed from 0.4% in Q2 to 0.1% in Q3. Notably, private consumption accounts for around 55% of Japan’s GDP, justifying the BoJ’s concerns about higher import prices dampening household purchasing power.
The USD/JPY pair had a limited reaction to the third-quarter GDP data, rising from 154.569 to a high of 154.633 after the release. Economists had expected the economy to contract by 0.6%, cushioning the impact on the yen.
The USD/JPY pair has soared 4.54% in the fourth quarter. While a weaker yen can boost external demand, import prices are likely to rise, hitting household purchasing power. These trends may complicate the BoJ’s policy outlook, as higher import prices could curb spending but push consumer prices higher.
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See all USD/JPY forecastsRising Import Prices Highlight Inflation Risks
October’s producer prices highlighted the impact of a weaker yen on import prices. East Asia Econ shared a chart of PPI and import prices, stating:
“The gap between import prices and PPI in the October data illustrates the sort of pent-up inflationary pressures in Japan that is likely to be exposed if the JPY remains weak. Today’s data also show a decent rise in auto export prices, but to a level that is still 6% below the pre-tariff level.”
This combination of Prime Minister Takaichi’s policy goals, economic data, and uncertainty about a BoJ rate hike has pushed USD/JPY higher.
Traders may also question the lasting effectiveness of further yen intervention threats, given Takaichi’s support for ultra-loose policy and fiscal stimulus plans. Significantly, the third quarter GDP numbers call for both, fiscal stimulus and a more dovish BoJ Policy stance.
US Economic Data and the Fed Outlook
While Japanese data weighs on BoJ rate hike bets, US economic indicators and Fed speakers will influence US dollar demand later on Monday.
Economists expect the NY Empire State Manufacturing Index to drop from 10.7 in October to 6.1 in November. A larger-than-expected drop toward 0 could raise fears of a US recession, weighing on the US dollar. However, the numbers are unlikely to affect the Fed’s policy stance. US inflation and jobs data remain the Fed’s focal points as policymakers await delayed data following the US government reopening.
Meanwhile, hawkish Fed speeches may send USD/JPY higher during the US session. FOMC members Jefferson and Williams are due to speak. Rising Fed focus on inflation over jobs data could further temper bets on a December Fed rate cut. A less dovish Fed policy stance may send USD/JPY above the November 12 high of 155.044.
The key question remains whether concerns about elevated inflation override weaker labor market signals at the December FOMC meeting.
USD/JPY Scenarios: Diverging Monetary Policies
- Bearish USD/JPY Scenario: Hawkish BoJ comments, intervention threats, weak US data, and dovish Fed rhetoric could drag USD/JPY toward 150.
- Bullish USD/JPY Scenario: Dovish BoJ signals, strong US data, and hawkish Fed rhetoric could send USD/JPY toward 157.
Read the full USD/JPY forecast, including chart setups and trade ideas.
Key Market Drivers to Watch Today:
- Bank of Japan commentary.
- Intervention threats.
- US data.
- Fed speakers.
For more in-depth analysis, review today’s USD/JPY trading setups in our latest reports and consult the economic calendar.
