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USD/JPY Forecast: Key Data on Japan’s Household Spending and Wage Growth
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Key Points:
- Household spending and wage growth will spotlight the Bank of Japan and the Japanese Yen on Tuesday, August 6.
- Bank of Japan commentary also requires consideration as the carry trade unwind sends the USD/JPY toward 140.
- Later in the session on Tuesday, the US RCM/TIPP Economic Optimism Index requires consideration.
In this article:
Household Spending
Japan’s household spending data will be crucial for USD/JPY trends on Tuesday, August 6.
Economists forecast household spending to fall by 0.9% year-on-year in June after declining by 1.8% in May. A pickup in household spending could fuel demand-driven inflation, influencing investor bets on a Q4 2024 Bank of Japan rate hike.
Moreover, rising household spending could bolster the Japanese economy, contributing over 50% to GDP. The economy contracted by 0.5% in Q1 2024 as private consumption fell by 0.7%. Upbeat spending figures could push the USD/JPY toward 140.
Conversely, weaker household spending trends could reduce bets on Q4 2024 BoJ rate hike and support a USD/JPY move toward 150.
Other Stats
Wage growth figures from Japan also require consideration. Economists forecast average cash earnings to increase by 2.3% year-on-year in June, up from 1.9% in May.
Higher wages could signal an uptrend in household spending and demand-driven inflation. A higher inflation outlook could support a more hawkish BoJ rate path.
Bank of Japan Rate Path, Interest Rate Differentials, and the Carry Trade Unwind
On July 31, the Bank of Japan raised interest rates and reduced Japanese Government Bond (JGB) purchases. The policy move coincided with rising bets on multiple 2024 Fed rate cuts and fears of a US recession.
A narrowing in interest rate differentials between the Japanese Yen and the US dollar strengthened the Yen, possibly leading to margin calls and the unwinding of Yen-dollar carry trades. A stronger Yen could lead to shortfalls when converting back from the US dollar, increasing demand for the Yen and further strengthening it.
Carry trades, popular in the FX space. involve borrowing in a low-interest-rate environment to invest in a higher-interest-rate environment. For the USD/JPY, carry trades involve being long on the US dollar or short on the Yen. USD/JPY movements are exaggerated as investors use leverage to boost returns.
The USD/JPY fell from a July 31 high of 153.889 to an August 5 low of 141.684 due to carry trade unwinding.
Equity and crypto market moves following the BoJ policy decision also reflected the effects of unwinding carry trades.
Is the Yen carry trade unwind close to an end?
Multiple 2024 Fed rate cuts and a US economic recession could narrow interest rate differentials further, weakening the USD/JPY and delivering more pain to the markets.
Expert Commentary
Brookings Institution Senior Fellow Robin Brooks commented on the Yen carry trade, stating,
“Price action since Friday offers a good lens on where the Yen carry trade is concentrated. EM currencies that have been most hit are the Mexican Peso and Colombian Peso, both of which have been known to harbor lots of carry trades. South Africa and Turkey are also getting hit…”
US Economic Calendar
Later in the Tuesday session, the RCM/TIPP Economic Optimism Index needs consideration.
Economists expect the Index to rise from 44.2 in July to 45.0 in August, potentially influencing the USD/JPY pairing amid US recession fears.
The Index reflects consumer views on the US economy, personal finances, inflation, and the labor market. A higher-than-expected Index would suggest increasing consumer spending, easing concerns about the economic outlook as it contributes over 60% to GDP.
Moreover, higher spending trends could fuel demand-driven inflation, reducing the need for multiple 2024 Fed rate cuts. A less dovish Fed rate path may support a USD/JPY move toward 150.
Expert Views
Bloomberg Chief Markets Editor David Ingles said,
“Govt bonds as a group up 8 straight days, longest streak in 4 years. Growth outlook souring, rate cuts starting to come out of the kitchen. Swaps signal 3 Fed cuts now fully priced this year. Eerily enough, last time we had an 8-day streak was when pandemic lockdowns pummeled the global economy.”
Short-term Forecast: Bearish
USD/JPY trends will hinge on household spending and wage growth numbers from Japan. Upbeat numbers could raise investor bets on a Q4 2024 BoJ rate hike and a USD/JPY fall below 140.
Investors should remain alert. Monitor real-time data, central bank monetary policy decisions, and expert commentary to adjust your trading strategies accordingly. Stay updated with our latest news and analysis to manage USD/JPY volatility.
USD/JPY Price Action
Daily Chart
The USD/JPY sat well below the 50-day and 200-day EMAs, confirming the bearish price trends.
A USD/JPY return to 145 would support a move toward 150. Furthermore, a breakout from 150 could bring the 151.685 resistance level into view.
Japan’s household spending and the RCM/TIPP Economic Optimism Index require consideration on Tuesday.
Conversely, a drop below the 143.495 support level could signal a fall to the 141.032 support level. A break below the 141.032 support could bring sub-140 into play.
The 14-day RSI at 13.96 shows the USD/JPY in oversold territory. Buying pressure may increase at the 143.495 support level.
About the Author
Bob Masonauthor
With over 20 years of experience in the finance industry, Bob has been managing regional teams across Europe and Asia and focusing on analytics across both corporate and financial institutions. Currently he is covering developments relating to the financial markets, including currencies, commodities, alternative asset classes, and global equities.
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