USD/JPY Fundamental Weekly Forecast – US Economy Outperforming Its Japanese Counterpart

The Dollar/Yen settled higher last week as the spread between U.S. Government bond yields and Japanese Government bond yields widened, making the U.S. Dollar a more attractive asset. The spread is widening because U.S. inflation is rising while Japanese inflation remains flat-to-lower.

Furthermore, the U.S. economy remains on track for a strong recovery while the Japanese economy is still struggling. Finally, the pace of U.S. vaccinations is currently outpacing that in Japan, which again favors a much stronger recovery in the United States.

Last week, the USD/JPY settled at 109.874, up 0.925 or +0.85%.

Japan Economy Faces Challenges

Last week began with Bank of Japan Governor Haruhiko Kuroda warning the unevenness of the world’s recovery from a coronavirus-triggered recession could lead to an increase in savings, economic inequality and indebtedness.

“The trio of increased savings, inequality and debt is considered to be intertwined in practice and may theoretically reduce the natural interest rate,” Kuroda said in a speech to a BOJ-hosted academic conference.

Japan’s Jobless Rate Rises, Prices Fall as Pandemic Pain Persists; US Inflation Soars

Japan’s unemployment rate crept up and job availability slid in April, data showed last Friday, underscoring the pain the country’s prolonged battle with COVID-19 is inflicting on the economy.

Separate data showed core consumer prices in Tokyo fell in May, reinforcing expectations inflation will remain well below the central bank’s 2% target for the time being.

The government is looking to extend state of emergency curbs to combat at the pandemic by about three weeks to June 20, a cabinet minister said on Friday, clouding the outlook for the fragile recovery.

Japan’s jobless rate rose to 2.8% in April from 2.6% in March, government data showed on Friday, exceeding a median market forecast of 2.7%.

The jobs-to-applicants ratio stood at 1.09, down from the previous month’s 1.10, which was also the Reuters poll forecast.

Core consumer prices in Tokyo, considered a leading indicator of nationwide figures, fell 0.2% in May from a year earlier, separate data showed on Friday, matching a median market estimate.

Meanwhile, U.S. core PCE index vaulted 3.1% in April, the largest annual gain since July 1992, due to a recovery from the pandemic and various supply disruptions.

Weekly Forecast

Comparing U.S. and Japanese consumer inflation figures clearly shows the advantage is with the U.S. economy.

Japan’s economy shrank in the first quarter while the U.S. economy expanded, and many analysts expect any rebound in the current quarter to be modest as renewed state of emergency curbs hurt consumption.

Weak domestic demand has stoked fears of a return to deflation even as other major economies see inflation tick up, keeping the Bank of Japan under pressure to maintain massive stimulus.

Unless U.S. Treasury yields plunge or the U.S. economy begins to show signs of weakness, we’re looking for the USD/JPY to remain underpinned with a strong bias to the upside.

The major report that should set the near-term tone in the USD/JPY is Friday’s Non-Farm Payrolls report. Traders expect the report to show the economy added 645K jobs in May. Matching or exceeding this figure should lift the Dollar/Yen.