Japanese Yen Forecast: USD/JPY Slips on Surging JGB Yields Ahead of PCE

USD/JPY briefly dropped below crucial 155 support as markets virtually fully price in a 25-basis-point December Bank of Japan rate hike. 10-year Japanese Government Bond (JGB) yields soared to 1.941% on Thursday, December 4, their highest level since mid-2007, strengthening the Japanese yen.

The December meeting may redefine USD/JPY’s multi-month trajectory as traders assess whether the BoJ is committing to a sustained tightening cycle.

This week, BoJ Governor Kazuo Ueda signaled an imminent rate hike and fueled uncertainty about the number of potential rate hikes in two separate speeches. He told lawmakers there was no consensus on the neutral interest rate.

A higher-than-expected neutral rate would send JGB yields sharply higher, narrowing the US-Japan rate differential, favoring the yen. This shift matters because it signals a potential acceleration in yen strength if markets begin pricing in a structurally higher neutral rate.

On Friday, December 5, Japanese household spending data caught markets by surprise.

Below, I’ll discuss the macro backdrop, the near-term price catalysts, and technical levels traders should closely watch.

Japanese Household Spending Challenge BoJ Rate Hike Bets

Japanese household spending plunged 3.5% month-on-month in October after falling 0.7% in September. The slump in household spending contrasted with last week’s retail sales report, which showed a 1.6% MoM jump in October after stalling in September.

Household spending and retail sales trends are crucial for the BoJ. First, the mixed October numbers would fuel uncertainty about demand-driven inflation, and second, question hopes for an economic recovery, given that private consumption contributes around 55% to Japan’s GDP.

For context, the Japanese economy contracted by 0.4% quarter-on-quarter in the third quarter after expanding 0.6% the previous quarter. Private consumption growth slowed from 0.4% to 0.1%.

Looking at the one-minute chart, the pair briefly rose to a post-household spending data release high of 155.156 before dropping to a low of 155.109. USD/JPY price action showed markets initially downplaying the effect of the numbers on the BoJ rate path.

While market bets on a BoJ rate hike are boosting demand for the yen, key US data will fuel speculation about multiple Fed rate cuts.

US Personal Income and Outlays Report Takes Center Stage

Later on Friday, the highly anticipated Personal Income and Outlays report will be under the spotlight. Economists expect the Core PCE Price Index to rise by 2.9% year-on-year and by 0.2% MoM in September, matching August’s trends.

Despite the delayed report reflecting September numbers, any shift from August levels would likely influence bets on December and March Fed rate cuts. A more dovish Fed rate path would pull 10-year Treasury yields sharply lower, narrowing US-Japan rate differentials further.

Rising 10-year JGB and falling 10-year Treasury yields further support the short- to medium-term USD/JPY outlook, with 140 a medium-term price target.

Other stats include preliminary Michigan Consumer Sentiment numbers. The inflation components will require attention, given the market focus on the Fed’s dual mandate. Economists forecast Michigan Inflation Expectations to drop from 4.5% in November to 4.4% in December.

While key US data will influence US dollar demand, there are no FOMC member speeches to overshadow the reports. Fed Blackout Period is in effect until December 11, limiting Fed-driven volatility.

According to the CME FedWatch Tool, the probability of a December cut stood at 87.0% on December 4, down from 90.0% on December 3. Meanwhile, the chances of a March rate cut slipped from 53.4% to 48.8%. However, traders should closely monitor the December and March trends. The absence of US inflation data left softer labor market data to drive expectations. Incoming inflation data will recalibrate market expectations, with sticky inflation likely to curb dovish calls.

Technical Outlook: USD/JPY on a Downward Trajectory

Looking at the daily chart, USD/JPY traded above the 50-day and 200-day Exponential Moving Averages (EMAs), affirming a bullish bias. However, fundamentals have begun to shift from the technical trend, supporting a bearish outlook.

A break below the 155 support level would bring the 50-day EMA into play. If breached, the 153 support level would be the next key support. Crucially, a drop below the 50-day EMA would signal a bearish trend reversal, suggesting a near-term fall toward 150.

Position and Upside Risk

In my view, the household spending figures support a bearish short- to medium-term outlook. A USD/JPY drop below the 50-day EMA will likely bolster the case for a sharper decline toward 150 and the 200-day EMA. A break below the EMAs would signal a bearish trend reversal, bringing 140 into view.

For context, USD/JPY closed Q3 2007 at 114.860. The pair then plunged to a Q4 2011 low of 75.565 on narrowing rate differentials.

However, upside risks could unravel the bearish outlook. These risks include:

• Dovish BoJ rhetoric.
• Weak Q4 Japanese data.
• Hotter US inflation.
• Higher Michigan Inflation Expectations

Despite the upside risks, yen intervention warnings will likely cap upside around the November 20 high of 157.893, based on past communication.

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

Conclusion: Longer-Term Trajectory to 140 in Play

In summary, BoJ monetary policy normalization and multiple Fed rate cuts will send USD/JPY sharply lower on narrowing rate differentials. Barring upside risk developments, USD/JPY will likely fall toward 140 in the 1-6 month timeframe. A drop below 140 would expose the 2023 low of 127.215 as a 6-12 month price target.

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