Japanese Yen remains depressed as fiscal concerns weigh on BoJ outlook

The Japanese Yen (JPY) recovers slightly from an over two-week low touched against its American counterpart during the Asian session on Monday following the release of stronger domestic data. In fact, Japan’s service-sector inflation rose for the second straight month in September and reinforced the Bank of Japan’s (BoJ) view that rising labour costs will help keep inflation near its 2% target. The data keeps the door open for gradual interest rate hikes and turns out to be a key factor that provides a modest lift to the JPY.

Meanwhile, Japan’s new Prime Minister Sanae Takaichi is expected to pursue expansionary spending and resist early tightening. This, along with economic uncertainty in the US, has tempered hopes for an immediate BoJ rate hike and might hold back the JPY bulls from placing aggressive bets. Investors might also opt to move to the sidelines ahead of the crucial two-day BoJ meeting this week. Furthermore, the US Federal Reserve (Fed) decision on Wednesday will drive the US Dollar (USD) and the USD/JPY pair in the near term.

Japanese Yen struggles to lure buyers despite firming BoJ rate hike bets

• Data released earlier this Monday showed that Japan’s Services Producer Price index perked up for the second straight month in September and accelerated to 3.0% from a 2.7% gain in August. With consumer inflation in Japan exceeding the Bank of Japan’s 2% target for well over three years, the latest figures back the case for further policy tightening by the central bank and provide a modest lift to the Japanese Yen.
• Japan’s new Prime Minister Sanae Takaichi, a fiscal and monetary dove, is seen as the successor of the former Premier Shinzo Abe’s economic policies and is known for her pro-stimulus stance. This has been fueling concerns about Japan’s fiscal health and clouds the outlook for further BoJ policy tightening, which, in turn, might hold back the JPY bulls from placing aggressive bets and keep a lid on further gains.
• The US Bureau of Labor Statistics reported on Friday that the headline Consumer Price Index rose by 0.3% in September, putting the annual inflation rate at 3%. Excluding food and energy, the gauge showed a 0.2% monthly gain and an annual rate stood at 3%. The reading fell short of consensus estimates and reaffirmed market bets for an imminent interest rate cut by the US Federal Reserve later this week.
• Traders are also pricing in a greater chance of another rate reduction at the December FOMC policy meeting, which, in turn, fails to assist the US Dollar to capitalize on Friday’s goodish rebound from a one-week low. Moreover, the divergent BoJ-Fed policy expectations could offer some support to the lower-yielding JPY and cap the upside for the USD/JPY pair ahead of this week’s key central bank events.
• The US Fed is scheduled to announce its decision at the end of a two-day policy meeting on Wednesday, and will be followed by the BoJ policy update on Thursday. The outlooks will play a key role in determining the next leg of a directional move for the USD/JPY pair.
• On the trade-related front, top Chinese and US economic officials on Sunday have agreed on the framework of a potential trade deal that will be discussed when US President Donald Trump and Chinese President Xi Jinping meet later this week. This helps ease worries about an all-out trade war between the world’s two largest economies, which could undermine the JPY’s safe-haven status.

USD/JPY could climb further once the 153.25-153.30 hurdle is cleared

From a technical perspective, some follow-through buying beyond the 153.25-153.30 region, or the highest level since February, touched earlier this month, will be seen as a fresh trigger for the USD/JPY bulls. Given that oscillators on the daily chart have been gaining positive traction and are still away from being in the overbought territory, spot prices might then aim towards reclaiming the 154.00 round figure. The momentum could extend further towards the next relevant hurdle near mid-154.00s en route to the 154.75-154.80 region and the 155.00 psychological mark.

On the flip side, the Asian session low, around the 152.65 zone, could act as an immediate support, below which the USD/JPY pair could slide to the 152.25 intermediate support en route to the 152.00 mark. A convincing break below the latter could negate the positive outlook and prompt some technical selling, paving the way for deeper losses towards the 151.10-151.00 support.