Japan Eyes Overseas Business Tax Breaks, Economic Indicators Signal Mixed Outlook

The dollar strengthened against the yen, driven by expectations of significant interest rate differentials, despite warnings from Japanese officials about currency intervention. The Bank of Japan maintained its interest rates unchanged as anticipated, projecting softer economic growth and heightened inflation in the upcoming years due to increased import costs and reduced government relief measures.

The Bank of Japan revised its forecast for consumer price index inflation for fiscal 2024 to range between 2.6% and 3%, up from the previous forecast of 2.2% to 2.5%. However, GDP outlooks were revised downward for fiscal years 2024 and 2025 due to higher inflation and global economic uncertainties.

Japanese officials emphasized readiness to intervene in currency markets to support the yen, with Bank of Japan Governor Kazuo Ueda highlighting the potential impact of yen falls on inflation and future interest rate hikes. Despite the benefits for exporters, the weak yen poses challenges such as increased import costs and inflationary pressures.

The ruling Liberal Democratic Party (LDP) of Japan is weighing tax breaks for companies repatriating foreign profits to stem the yen's decline. Although the proposal may be included in the mid-year policy blueprint, its impact remains uncertain. Nonetheless, the government prioritizes domestic investment for sustainable growth. Meanwhile, a panel led by top currency diplomat Masato Kanda aims to review Japan's balance of payments by June.

In economic news, Japanese industrial production exceeded expectations in March, signaling relief in the manufacturing sector following two consecutive months of declines. However, retail sales grew less than anticipated, suggesting ongoing weakness in consumer spending despite wage increases, which could lead to softer inflation in the future.

Additionally, proposed export controls by Japan related to semiconductors have raised concerns about normal trade between Chinese and Japanese enterprises, according to China's commerce ministry. Despite these challenges, Japan's service sector activity surged in April, driven by robust business and consumer spending. However, household spending likely continued to decline in March, underscoring the challenges facing policymakers in fostering sustainable economic growth.

In manufacturing, factory activity contracted at a slower pace in April, with firms experiencing inflationary pressures but also benefiting from strong market demand. Despite these mixed indicators, analysts anticipate a rebound in factory output and stable retail sales, potentially signaling positive momentum for the Japanese economy after a period of sluggish growth.

The U.S. dollar gained against most currencies on Tuesday, bolstered by investors analyzing Federal Reserve officials' comments on future interest rates. Market expectations for rate cuts have surged after last week's Fed meeting and softer U.S. jobs report, with a September rate cut anticipated at 64.5%, according to CME's FedWatch Tool.

With a light economic calendar, focus shifts to upcoming speeches by Fed officials later in the week, while attention remains on economic indicators such as the consumer sentiment reading from the University of Michigan on Friday. As a consequence, this could lead to the yen remaining stable, fluctuating within its current range, and sustaining its depreciation against the US dollar throughout this timeframe.

Data for Technical Analysis (30Min) CFD USD/JPY

Resistance : 155.23, 155.26, 155.30

Support : 155.15, 155.12, 155.08

30Min Outlook 

Source: TradingView

Buy/Long 1 If the support at the price range 155.05 – 155.15 is touched, but the support at 155.15 cannot be broken, the TP may be set around 155.23 and the SL around 155.00, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 155.23 – 155.33, TP may be set around 155.40 and SL around 155.10, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 155.23 – 155.33 is touched, but the resistance at 155.23 cannot be broken, the TP may be set around 155.12 and the SL around 155.38, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 155.05 – 155.15, TP may be set around 155.00 and SL around 155.28, or up to the risk appetite.       

Pivot Points May 8, 2024 03:04AM GMT