Japan Private Sector PMIs Send Mixed Signals Ahead of the BoJ

Highlights

• It was a busy start to a busy week for the USD/JPY, with flash private sector PMIs in focus.
• Importantly, service sector activity held steady despite weaker new order growth.
• Later today, US private sector PMIs will likely have more impact, with the services PMI the focal point.

This morning, Japan’s private sector drew interest, with prelim PMI numbers for July in focus. There was greater interest in the numbers as investors looked toward the Bank of Japan’s monetary policy decision on Friday. The markets are looking for reasons for the BoJ to tweak from ultra-loose.

However, the flash private sector PMIs will give the BoJ little reason to shift from ultra-loose. While national inflation numbers supported a tweak, the macroeconomic environment will remain a concern.

The services PMI fell from 54.0 to 53.9, with the manufacturing PMI declining from 49.8 to 49.4. Economists forecast the services PMI to fall from 54.0 to 53.4 and the manufacturing PMI to hold steady at 49.8.

According to the Prelim Survey,

• New orders across the services sector rose at a weaker pace, while manufacturers reported new orders falling at a more marked pace.
• Employment conditions weakened, with manufacturers reporting a weaker hiring rate, while service sector firms reported a fall in employment.
• Inflationary pressures picked up in July, with output prices rising at a more marked pace across the services and manufacturing sectors.
• Input prices also accelerated, with the services sector reporting higher input prices, offsetting weaker prices across the manufacturing sector.
• Optimism waned at the start of the third quarter, with manufacturers and service providers reporting a weaker positive outlook.

Two sub-components will likely draw the interest of the Bank of Japan. Softer output prices and weaker labor market conditions could give the BoJ reason to delay a tweak. However, it will likely hinge on the Tokyo inflation numbers on Friday.

USD/JPY Reaction to Japan Private Sector PMIs

Ahead of the flash PMI numbers, the USD/JPY rose from an opening price of 141.550 to a high of 141.811 before easing back.

However, in response to the flash July PMIs, the USD/JPY rose to a post-stat high of 141.693 before falling to a low of 141.599.

This morning, the USD/JPY was down 0.13% to 141.637.

Up Next

Prelim private sector PMI numbers for July will be in focus later today. We expect the services PMI to have more impact on market risk sentiment. However, investors should consider the sub-components, including prices, employment, and new orders. A hotter-than-expected services PMI would support a more hawkish Fed.

While the focus will be on the US services PMI, PMI numbers from Europe could impact market risk sentiment.