USD/JPY Forecast: Impact of Japan’s Inflation on Yen and Future Rate Decisions

Inflation and the Bank of Japan

On Friday (May 24), inflation figures for April will influence buyer demand for the USD/JPY.

Economists forecast the annual inflation rate to fall from 2.7% to 2.3% and core inflation to ease from 2.6% to 2.2%.

Softer inflation figures could dampen the market speculation about a June Bank of Japan interest rate cut. The Bank of Japan continues to focus on household spending and the services sector to fuel demand-driven inflation. In May, the Jibun Bank Services PMI fell from 54.3 to 53.6, suggesting no immediate rush for the Bank of Japan to raise interest rates.

Nevertheless, weakness in the Yen remains a concern for the Bank of Japan and the Japanese government. The weak Yen lifts import prices, impacting household spending, a focal point for the BoJ. Investors should monitor any BoJ or Japanese government views on the inflation figures.

US Economic Calendar: Durable Goods Orders, Consumer Sentiment, and the Fed

Later in the Friday session, durable goods orders and finalized Michigan Consumer Sentiment numbers will attract investor attention.

After better-than-expected US data on Thursday, upbeat stats could further reduce investor bets on a September Fed rate cut.

According to preliminary numbers, the Michigan Consumer Sentiment Index fell from 77.2 to 67.5 in May. Moreover, the Michigan Inflation Expectations Index rose from 3.2% to 3.5%.

Furthermore, economists forecast core durable goods orders to increase by 0.1% in April after rising by 0.2% in March.

The US Services PMI and jobless claims data impacted investor bets on a September Fed rate cut. According to the CME FedWatch Tool, the chances of the Fed leaving interest rates unchanged in September increased from 41.9% to 48.4% on Thursday (May 23).

Beyond the numbers, investors should monitor FOMC member speeches. FOMC member Christopher Waller is on the calendar to speak. Reactions to the US economic data could move the dial.

Short-term Forecast

Near-term trends for the USD/JPY will hinge on inflation numbers from Japan and FOMC member chatter. Softer inflation numbers from Japan and hawkish Fed chatter could tilt monetary policy divergence toward the US dollar.

USD/JPY Price Action

Daily Chart

The USD/JPY sat well above the 50-day and 200-day EMAs, confirming the bullish price trends.

A USD/JPY break above the 157.5 handle would support a move toward the April 29 high of 160.209.

On Friday (May 24), inflation numbers from Japan and the US economic calendar need consideration.

Alternatively, a USD/JPY drop below the 155 handle could signal a fall toward the 50-day EMA. A fall through the 50-day EMA could give the bears a run at the 151.685 support level.

The 14-day RSI at 61.26 indicates a USD/JPY move to the April 29 high of 160.209 before entering overbought territory.