USD/JPY: Strong Japanese Data Keeps Bears in Control

• BOJ may raise rates further as Japanese data stays firm
• Tokyo inflation beats expectations, supporting BOJ tightening
• Retail spending and low unemployment point to a resilient economy
• USD/JPY directional bias bearish near-term

Summary

Japanese economic data remains firm, keeping the prospect of further rate hikes from the Bank of Japan alive. At the margin, it skews directional risks for USD/JPY further to the downside as it teeters above key technical support.

So Far So Good for Hawkish BoJ

Japanese economic data released Friday printed either in line or above expectations. Inflation in the nation’s capital, Tokyo, delivered a hefty upside surprise in January, lifting 3.4% from a year earlier following an upwardly revised 3.1% increase in December.

Stripping out fresh food prices, core inflation rose 2.5% from a year earlier, in line with expectations and up from 2.4% a month earlier. With energy prices excluded, the so-called core-core measure lifted 1.9% over the year, again in line with forecasts and a tenth above the December reading.

The Bank of Japan’s targets 2% annual inflation in the ex-fresh food measure, although it also pays close attention to core-core reading given volatility in energy prices. The Tokyo report arrives three weeks before the national inflation figure, providing a lead indicator for markets on what to expect.

Source: TradingView

With the Bank of Japan trying to create a virtuous cycle where persistent wage pressures lead to sustained domestic inflationary pressures, the news elsewhere was promising.

Unemployment edged lower to 2.4%, down a tenth on November and market expectations. It’s not a new development, but labour market conditions remain incredibly tight with 1.25 job openings for every unemployed worker. The ratio was unchanged from a month earlier.

Elsewhere, retail spending—a major component in household spending which is the largest part of the economy—surged 3.7% in December from a year earlier, breezing past forecasts for a smaller increase of 3.2%. It marked a strong acceleration from the 2.8% pace of November.

October Rate Hike Fully Priced, Risks Skewed Earlier

The data keeps the Bank of Japan on track to add to the 25bps rate hike delivered last Friday.

Swaps markets are fully priced for another 25bp move by October, with implied probability of an earlier move gradually rising over the first half of the year. It’s a big assumption, but if external economic conditions hold up, the BoJ may be tempted to go earlier, especially if it sees  evidence of big wage increases when annual negotiations conclude in March.

Source: Bloomberg

Speaking Thursday, Bank of Japan Deputy Governor Ryozo Himino signalled an intent to raise rates further if economic conditions align with the bank’s forecasts.

He stressed prolonged periods of negative real interest rates were "not normal" outside of economic shocks, especially once deflationary pressures ease.

With no more Japanese data this week, it comes down to the US calendar to guide USD/JPY direction towards month-end. I wrote about the releases to watch out for in a separate post on Thursday. For those seeking trade entry or exit points around the data, you can access the link here.

USD/JPY Heavy Despite Tariff Hit

USD/JPY remains heavy on the charts. Despite another failed downside break of wedge support thwarted by news the US government will apply 25% tariffs on Mexican and Canadian imports from Saturday, it’s notable the strengthening in the dollar in response has not been overly impactful on the yen so far.

Source: TradingView

With momentum indicators bearish, traders should be alert to the risk we see another attempt at a sustained downside move soon. Dips below 154 have been bought recently, putting that firmly on the radar. Below, other levels of note include 153.38 and 200-day moving average. If the latter were to give way, there is little visible support until December swing low at 148.65.

-- Written by David Scutt

Follow David on Twitter @scutty

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