Japan continues to face increased cost issues due to the depreciation of the yen.

The Japanese yen has weakened after the Bank of Japan (BoJ) maintained its highly accommodative monetary policy, with no indication of whether it will be discontinued next year or not. The BoJ kept its short-term interest rate at -0.1% and the yield on 10-year government bonds at around 0%. Concerns persist within the BoJ regarding heightened economic uncertainties both domestically and internationally.

The BoJ stressed the necessity of considering the economy's growth prospects, including prices of goods and services, when contemplating adjustments to monetary policy at its recent meeting. Additionally, the BoJ maintains its inflation target at 2%, coupled with increasing employee wages.

Japan's manufacturing Purchasing Managers' Index (PMI) fell to 47.7 in December, impacted by weak demand and declining prices of goods. Production and new orders contracted rapidly, leading to a similar decline in exports. Employment levels remained relatively unchanged, but the cost inflation of raw materials surged due to the yen's depreciation and increased labor and material costs.

On the other hand, the services PMI increased to 52 in December. However, the service sector's growth remained subdued compared to the 2023 average, despite a slight overall expansion. Employment figures almost remained steady, with minor increases in hiring over the past two months. Yet, the cost inflation of raw materials escalated due to renewed service provider fees towards the end of the year.

Japan's significant manufacturing index increased by 5.7% in the fourth quarter due to continued favorable business conditions. Nonetheless, manufacturing companies need to remain cautious due to rising import costs and increased raw material prices, directly impacting profit margins. Additionally, there are predictions of a potential downturn in business conditions in the next few months, with the significant manufacturing index projected to be around 1.3% in the first quarter of the next year.

Japan's economy contracted by 0.7% compared to the previous quarter in the third quarter of the year, mainly affected by sluggish domestic demand. Decreased exports coupled with increased imports led to heightened production costs, subsequently reducing private consumption by 0.2%. Moreover, government investment decreased by 0.8%.

The yield on 10-year government bonds dropped to 0.6%, reflecting the BoJ's decision to maintain its highly accommodative monetary policy amid global economic uncertainties. Investors anticipate a likely change in the BoJ's loose monetary policy within the coming year, with April being considered a highly probable option.

Techical analysis data (5H)

Resistance: 145.29, 146.05, 147.40

Support: 143.18, 141.83, 141.08

Source: Investing.com