USD/JPY Fundamental Daily Forecast – BOJ Could Increase Stimulus to Support Fragile Economic Recovery

The Dollar/Yen edged higher last week after posting a choppy, two-sided trade last week. Helping to keep a lid on the Forex pair was a drop in U.S. Treasury yields, while underpinning the market was strong U.S. economic data. Report out of Japan also signaled more weakness for the economy. Essentially, with the Fed moving closer to at least discussing tapering its asset buying program and the Bank of Japan considering new stimulus, the advantage is to the U.S. Dollar.

Last week, the USD/JPY settled at 109.687, up 0.161 or +0.15%.

10-Year Treasury Yield Falls to 3-month Low of 1.43% Despite Inflation Fears

Treasury yields it a 3-month low last week as investors shrugged off the 5% annual jump in inflation reported in the previous session and appeared to buy the Federal Reserve’s argument that the price increases will be temporary.

Reopening US Economy Heats Up Consumer Inflation; Labor Market Recovery Gaining Traction

U.S. consumer prices rose solidly in May, leading to the biggest annual increase in nearly 13 years as a reopening economy boosted demand for travel-related services, while a global semiconductor shortage drove up prices for used motor vehicles.

The pandemic’s easing grip on the economy was also underscored by other data from the Labor Department on Thursday showing the number of Americans filing new claims for unemployment benefits fell last week to the lowest level in nearly 15 months.

Japan Upgrades Q1 GDP on Smaller Hit to Domestic Demand

Japan’s economy shrank less than initially reported in the first quarter on smaller cuts to plant and equipment spending, but the coronavirus pandemic still dealt a huge blow to overall demand.

The economy shrank by an annualized 3.9% in January-March, not as bad as the preliminary reading of a 5.1% contraction, but still posting the first fall in three quarters, Cabinet Office data showed last week. The reading, which beat economists’ forecast for a 4.8% decline, equals a real quarter-on-quarter contraction of 1.0% from the prior quarter, versus a preliminary 1.3% drop.

Weekly Outlook

The Fed’s two-day policy meeting will likely dominate investor behavior in the Dollar/Yen this week.  Although the central bank is not expected to take any action, its forecasts for interest rates, inflation and the economy could move the USD/JPY.

Fed Chairman Jerome Powell speaks to the press after the central bank issues its statement at 18:00 GMT on Wednesday, June 16. He is expected to affirm the Fed’s commitment to easy policy. However, concerns over inflation and how the Fed could react is likely to influence market direction, especially after a hotter-than-expected consumer inflation reading for May was reported last Thursday, CNBC reported.

In Japan, the Bank of Japan is set to keep its money spigots wide open and may extend its pandemic-relief programs this week to support a fragile economic recovery, reinforcing expectations it will lag major counterparts in dialing back crisis-mode policies.

At its two-day policy meeting ending on June 18, the BOJ is set to maintain its yield curve control (YCC) targets at -0.1% for short-term interest rates at 0% for 10-year bond yields.

It is also expected to reaffirm its pledge to buy assets such as bonds and exchange-traded funds (ETFs), though it has been scaling back huge purchases to make its long running stimulus program more sustainable.

THE BOTTOMLINE:  The U.S. consumer price index increased 0.6% last month after surging 0.8% in April, which was the largest gain since June 2009, while in Japan, core consumer prices fell 0.1% in April from a year earlier, marking the ninth straight month of declines and remaining distant from the BOJ’s 2% target. Clearly, the U.S. economy is moving forward faster than the Japanese economy.