The USDJPY has been rising on a combination of a weaker yen and a stronger dollar. However, over the coming days, several events could serve as catalysts for the pair to surge or change course. These include the release of inflation figures on Friday, a meeting with US trade representatives, and elections for the Upper House. The outcomes of these events could significantly impact the yen’s movement, making it crucial for traders and investors to remain alert and prepared.
The weakness in the yen has already prompted Japanese authorities to intervene verbally. Deputy Chief Cabinet Secretary Kazuhiko Aoki expressed concern about “speculative moves” as the currency weakened. He also warned that policymakers were looking at the situation. While these interventions are common, they sometimes serve as preludes to the BOJ stepping in to guide the market. Recent yen movement has therefore attracted close scrutiny from officials and traders alike.
Getting a Deal
On Wednesday, US President Donald Trump expressed pessimism about finding a deal with Japan over trade, saying that the 25% tariff he’d imposed through a “letter” would be the likely outcome. However, this could also be a negotiating tactic, as America’s point man on trade, Treasury Secretary Scott Bessent, leads a delegation to Japan for the World Expo. He’s reportedly scheduled to meet with Prime Minister Shigeru Ishiba, potentially on Friday.
With Ishiba’s LDP party facing a difficult election over the weekend, there is renewed pressure to announce a last-minute deal. Polling shows Japanese people are unsatisfied with the ruling LDP party, which has been in power for seventy years. The potential outcome of these elections could have a significant impact on the yen and the currency markets, especially given how recent yen movement has responded sharply to political risk.
The Problem for the BOJ
The traditional way to address a weak currency and tamp down inflation is for the central bank to raise interest rates. But that’s a difficult task for the BOJ. Decades of low rates have left banks vulnerable to a rise in yields as they accumulated a large amount of low-interest bonds. A very weak economic revival could be stifled if interest rates rise too high.
This has left BOJ Governor Kazuo Ueda with little recourse but to talk tough on interest rate hikes, without actually delivering monetary tightening. Lower inflation would be a welcome relief for the BOJ. But, it probably won’t change the rhetoric about hiking. Expectations of lower inflation have weakened the yen recently, creating another problem for the BOJ. A weak currency increases the cost of imports, and by extension, puts upward pressure on inflation.
What the Data Says
The consensus among economists is that Japan’s June inflation rate will fall to an annual rate of 3.3% from 3.5% previously. The core rate is expected to drop more dramatically to 3.3% from 3.7%. The most significant component of increased consumer costs lately has been energy, mainly due to higher electricity prices.
Whether the data manages to move the markets could hinge on if a trade deal overshadows it. And traders might be hesitant to push the market too far ahead of the weekend’s election uncertainty. The yen could be in a very different place by Monday.