Japanese Yen Weekly Forecast: Bearish Risks Linger as Wage Data and Tariff Threats Loom

USD/JPY Rebounds from 142.678 on US Jobs Report

USD/JPY volatility spiked in the week ending July 3 as US labor market data drove shifts in sentiment. ADP numbers initially fueled bets on a Q3 Fed rate cut, but the official Jobs Report reversed these expectations, driving US dollar demand.

USD/JPY fell to a low of 142.678 before soaring to a high of 145.233. Despite the rally, a pullback on July 4 trimmed gains, with the pair ending the week down 0.09% at 144.495.

Outlook: Trade Developments, Economic Data, and Central Banks in Focus

US-Japan trade developments will take center stage as President Trump’s July 9 tariff deadline looms. Last week, Trump threatened a 35% tariff on Japanese goods, exceeding the 24% Liberation Day levy. Higher tariffs may further strain Japan’s trade terms and affect its economic outlook and the Bank of Japan’s rate path.

Meanwhile, economic indicators will give insights into the impact of existing US tariffs.

Wage Growth to Signal Consumption Trends

On Monday, July 7, wage growth figures from Japan could influence the BoJ’s stance and USD/JPY trends. Economists forecast average cash earnings to rise 2.4% year-on-year (YoY) in May after a 2% increase in April. Additionally, economists expect overtime pay to soften to 0.9% (April: +1.3% YoY).

Stronger wage growth could boost private consumption and fuel demand-driven inflation. A pickup in inflationary pressures and an improving economic backdrop may fuel speculation about a BoJ rate hike, lifting Yen demand. Conversely, softer wage growth could signal a less hawkish BoJ policy stance, which would weigh on the Yen.

Producer Prices Expected to Sink BoJ Rate Hike Expectations

Producer prices will give the BoJ inflation signals on Thursday, July 10. Economists forecast producer prices to rise 2.9% YoY in June, down from 3.2% in May. A lower reading could dampen BoJ rate hike expectations, impacting Yen appetite. Conversely, a higher reading may renew speculation of tighter policy.

Economists consider producer prices a leading inflation indicator given their influence on consumer price trends.

Why Do These Indicators Matter?

The BoJ recently paused its monetary policy normalization efforts, citing sluggish inflation and weakening economic momentum. Given that private consumption contributes over 50% to Japan’s GDP, wage growth data could be pivotal.

Better-than-expected data would support a more hawkish BoJ stance, while weak data may further delay rate hikes.

USD/JPY Outlook: Monetary Policy Uncertainty, Trade Headlines, and Economic Indicators

• Bullish Yen Scenario: Strong Japanese data, hawkish BoJ cues, or an escalation in the global trade war could drag USD/JPY toward 142.5.
• Yen Carry Trade Unwind Risks: A USD/JPY drop below the September 2024 low of 139.576 could accelerate the Yen Carry Trade Unwind.
• Bearish Yen Scenario: Softer Japanese data, dovish BoJ signals, or a de-escalation in the global trade war may send the pair toward 150.

US Data to Impact Fed Outlook and Dollar Demand

In the US, inflation expectations, jobless claims data, and Fed commentary will influence sentiment toward the Fed rate path and the US dollar.

Key events include:

• Consumer Inflation Expectations (July 8): Forecast to remain at 3.2% in June.
• FOMC Meeting Minutes (July 9).
• Initial Jobless Claims (July 10): Expected to increase from 233k (week ending June 28) to 235k (week ending July 5).

Softer inflation expectations and a spike in jobless claims may rekindle bets on a September Fed rate cut, impacting US dollar demand. Conversely, better-than-expected numbers may further dampen expectations of monetary policy easing, lifting demand for the US dollar.

Beyond the data, the FOMC Meeting Minutes and Fed speakers will also affect US dollar demand and USD/JPY trends.

Potential Price Scenarios:

• Bullish US Dollar Scenario: Strong US data, hawkish Fed commentary, and reduced trade friction may lift USD/JPY toward 150.
• Bearish US Dollar Scenario: Weak US data, dovish Fed rhetoric, and rising trade tensions could push USD/JPY toward 142.5.

Short-term Forecast:

USD/JPY’s direction will likely hinge on trade developments, key economic data, and monetary policy signals. Among these, trade developments will likely be the most influential in the week ahead.

East Asia Econ remarked on tariffs and the BoJ’s policy stance, stating:

“The renewed tariff threat is a dominating issue for Japan. Yesterday’s debate among leaders of the political parties didn’t reveal any new strategy to head off the risk. But today’s services PMI was firm, and in an interesting speech, board member Takata continued to sound cautiously constructive.”

USD/JPY Price Action

Daily Chart

On the daily chart, the USD/JPY trades below its 50-day and 200-day Exponential Moving Averages (EMA), indicating a bearish technical outlook.

A breakout above the 50-day EMA and 145 could pave the way to the 200-day EMA. Sustained buying pressure may enable the bulls to target the June high of 148.026.

On the downside, a drop below last week’s low of 142.678 could bring the 140.309 support level into play.

The 14-day Relative Strength Index (RSI) sits at 49.75, indicating USD/JPY can drop to the 140.309 support level before entering oversold territory (RSI< 30).

Key Takeaway

The USD/JPY faces heightened volatility amid evolving trade developments and central bank policy stances. Monitoring real-time developments will be crucial in navigating short-term movements.

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