USD/JPY Forecast: Japanese Economy Contracts in Q1 Affecting BoJ Rate Hike Hopes

The Japanese Economy and the Bank of Japan

First-quarter GDP numbers from Japan put the investor focus on the USD/JPY. The Japanese economy contracted by 0.5% in Q1 2024 after expanding by 0.1% in Q4 2023. Economists forecast the economy to contract by 0.4%.

According to the Cabinet Office,

• Private consumption slid by 0.7% in Q1 2024 after declining by 0.4% in Q4 2023.
• Capital expenditures fell by 0.8%.
• Services grew by 1.0% after contracting by 0.3% in Q4 2023.

The GDP report could impact immediate investor expectations of a Bank of Japan interest rate hike. Private consumption remained a bugbear through Q1. Nevertheless, growth in services was a positive takeaway from the report. The Bank of Japan hopes services to drive consumer price inflation and allow for a higher interest rate environment.

US Economic Calendar: Jobless Claims, the Housing Market, and the Fed

Later in the Thursday session, US labor and housing market data will attract investor interest. After the softer US CPI Report, a deterioration in US labor market conditions could fuel further investor bets on a September Fed rate cut.

However, economists forecast initial jobless claims to fall from 231k to 220k in the week ending May 11.

If the labor market tightens, wages and disposable income might increase. Tighter labor market conditions could boost consumer spending and lead to higher inflation. The Fed could leave interest rates higher for longer to curb consumer spending and dampen demand-driven inflation. A higher interest rate environment could raise borrowing costs and reduce disposable income.

The US housing market is a litmus test of the US economy and needs investor consideration. Better-than-expected housing sector data could signal a pickup in demand. Increasing demand drives house prices higher and supports consumer confidence and spending.

Economists forecast housing starts to increase by 3.8% in April after sliding by 14.7% in March. Moreover, economists expect building permits to slip by 0.2% after falling by 3.7% in March.

Investors should listen to upcoming speeches from FOMC members Michael Barr, Patrick Harker, Loretta Mester, and Raphael Bostic. Views on the latest CPI report and potential timing for a Fed rate cut could move the dial.

Short-term Forecast

Near-term trends for the USD/JPY will hinge on GDP numbers from Japan, US labor market data, and FOMC member chatter. Weaker-than-expected labor market data and support for a September Fed rate cut could further affect buyer demand for the USD/JPY. However, the contraction in the Japanese economy could leave interest rate differentials firmly favoring the US dollar.

USD/JPY Price Action

Daily Chart

The USD/JPY held above the 50-day and 200-day EMAs, sending bullish price trends.

A USD/JPY return to the 155 handle could support a move toward the 156 handle. A breakout from 156 would bring the April 29 high of 160.209 into view.

On Thursday, the Bank of Japan, US economic data, and FOMC member reaction to the US CPI Report need consideration.

Alternatively, a USD/JPY fall through the 50-day EMA could signal a drop toward the 151.685 support level.

The 14-day RSI at 48.73 suggests a USD/JPY fall to the 151.685 support level before entering oversold territory.