USD/JPY Forecast: Japan Inflation News and BoJ Guidance

Inflation and the Bank of Japan

On Friday, inflation numbers from Japan could impact buyer demand for the USD/JPY. Economists forecast the core annual rate of inflation to ease from 2.8% to 2.7% in March. Moreover, economists expect the annual inflation rate to soften from 2.8% to 2.7%.

Softer inflation numbers could align with recent forward guidance from the Bank of Japan on the interest rate path. On Thursday, Bank of Japan board member Asahi Noguchi favored a patient approach to further monetary policy tightening. Noguchi said the Bank of Japan would raise interest rates more slowly than its peers lifted rates during rate hike cycles.

However, the Bank of Japan must also grapple with the effects of a weaker Japanese Yen on the economy. A weaker Japanese Yen leads to higher import costs, impacting household spending. The Bank of Japan expects recent wage increases to fuel household spending and demand-driven inflation. Higher import costs would offset the effects of wage growth.

Trade data for March signaled a weakening demand environment, with imports falling by 4.9% year-on-year.

US Economic Calendar: Fed Speakers in Focus

On Friday, investors should monitor FOMC member commentary. Fed Chair Powell and FOMC members poured cold water on investor expectations of a June Fed rate cut.

US labor market conditions remain tight, with consumer spending continuing to drive the US economy.

Support for a more cautious approach to cutting interest rates could further shift investor bets on 2024 Fed rate cuts. FOMC member Austan Goolsbee is on the calendar to speak. The Chicago Fed President recently highlighted that the housing services sector is the biggest challenge to bringing inflation to the 2% target.

The CME FedWatch Tool reflects the effects of recent economic data and Fed speeches. According to the CME FedWatch Tool, the probability of a 25-basis point June rate cut fell from 20.1% (April 11) to 16.2% (April 18). Moreover, the chances of the Fed holding interest rates at 5.5% in September increased from 31.0% to 35.6% over the same period.

While the Fed remains the focal point, news updates from the Middle East also need monitoring.

Short-term Forecast

Near-term trends for the USD/JPY will likely hinge on inflation numbers from Japan and Fed commentary. Softer-than-expected inflation numbers and hawkish Fed chatter could further tilt monetary policy 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 April 16 high of 154.787 would support a move to the 155 handle.

Inflation numbers from Japan, Bank of Japan commentary, Fed speakers, and the Middle East need consideration.

Conversely, a USD/JPY break below the 153.5 handle could give the bulls a run at the 151.685 support level.

The 14-day RSI at 76.00 shows the USD/JPY in overbought territory. Selling pressure may intensify at the April 16 high of 154.787.