Japanese yen remains depressed as fiscal concerns weigh on BoJ outlook

The Japanese yen (JPY) is recovering slightly from over two-week lows touched against its US counterpart during the Asian session on Monday following the release of stronger domestic data. Indeed, inflation in Japan’s services sector rose for a second straight month in September, reinforcing the Bank of Japan’s (BoJ) view that rising labor costs will help keep inflation close to the 2% target. The data leaves the door open for gradual rate hikes and is proving to be a key factor providing a modest boost to the JPY.

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

Japanese yen struggles to lure buyers despite strong BoJ rate hikes

• Data released earlier on Monday showed that Japan’s producer price index for services rose for a second straight month in September, accelerating to 3.0% from a 2.7% rise in August. With consumer inflation in Japan exceeding the Bank of Japan’s 2% target for well over three years, the latest figures support the case for further policy tightening by the central bank and provide a modest boost to the Japanese yen.
• Japan’s new Prime Minister Sanae Takaichi, a fiscal and monetary dove, is seen as the successor to former Prime Minister Shinzo Abe’s economic policies and is known for his pro-stimulus stance. This has fueled concerns about Japan’s fiscal health and clouds the outlook for further BoJ policy tightening, which in turn could hold back JPY bulls from placing aggressive bets and cap further gains.
• The U.S. Bureau of Labor Statistics reported Friday that the headline consumer price index rose 0.3% in September, putting annual inflation at 3%. Excluding food and energy, the gauge showed a monthly increase of 0.2% and an annual rate of 3%. The reading missed consensus estimates and confirmed market bets on an imminent rate cut by the US Federal Reserve later this week.
• Traders are also pricing in a greater chance of another rate cut at the FOMC policy meeting in December, again not helping the US dollar capitalize on Friday’s good recovery from a one-week low. Furthermore, the diverging BoJ-Fed policy expectations could provide some support to the lower-yielding JPY and limit the upside for the USD/JPY pair ahead of this week’s key central bank events.
• The US central bank is scheduled to announce its decision at the end of a two-day policy meeting on Wednesday and will be followed by the BoJ’s policy update on Thursday. The outlook will play a key role in determining the next stage of a directional move for the USD/JPY pair.
• On the trade-related front, top Chinese and US economic officials on Sunday agreed on the framework for a potential trade deal to be discussed when US President Donald Trump and Chinese President Xi Jinping meet later this week. This helps ease concerns about a full-scale trade war between the world’s two largest economies, which could undermine the JPY’s safe-haven status.

USD/JPY may rise further once the 153.25-153.30 hurdle is cleared

From a technical perspective, some follow-up buying beyond the 153.25-153.30 region, or the highest level since February touched earlier this month, will be seen as a new trigger for the USD/JPY bulls. Given that oscillators on the daily chart have gained positive traction and are still away from being in overbought territory, spot prices may aim to regain the 154.00 round figure. Momentum may extend further towards the next relevant obstacle near the mid-154.00s on the way 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 slip to the 152.25 intermediate support on the way to the 152.00 mark. A convincing break below the latter could nullify the positive outlook and prompt some technical selling, paving the way for deeper losses towards the 151.10-151.00 support.