Tokyo Inflation Exceeds Expectations, Economic Uncertainties Persist

In November, Tokyo's consumer price index (CPI) inflation exceeded expectations, rising to 2.2% year-on-year, up from 1.8% in October, driven by robust private spending and wage growth. However, underlying inflation, excluding energy and fresh food, remained subdued at 1.9%, below the Bank of Japan’s (BOJ) 2% target for the eighth consecutive month.

Despite progress in wage and price growth, uncertainties such as U.S. policies under President-elect Trump pose risks to Japan's economic recovery. The government, while optimistic about moderate economic recovery, warned of potential impacts from global market fluctuations and tariffs.

Corporate spending rose 8.1% year-on-year in Q3, supporting domestic demand but moderated by geopolitical uncertainties. The government remains focused on boosting wages, with Prime Minister Shigeru Ishiba urging significant pay hikes during upcoming labor negotiations to meet long-term economic goals.

Japan’s economic outlook in recent months has been mixed, marked by declining factory activity, subdued demand, and a shift in monetary policy. Factory activity in November contracted at the fastest pace in eight months, as both domestic and international demand remained weak, particularly in semiconductor and automotive sectors. Employment also shrank for the first time in nine months, while firms raised output prices to counter persistently high input costs driven by rising labor, logistics, and raw material expenses.

Industrial output rose by 3.0% in October but fell short of expectations, reflecting weaker external demand and production bottlenecks. Retail sales growth also underperformed, highlighting challenges in consumer spending.

However, corporate spending on plant and equipment showed resilience, growing 8.1% year-on-year in the third quarter, indicating robust domestic demand. Nevertheless, uncertainties tied to China’s economic slowdown and potential disruptions from global trade tensions could deter future investment.

Meanwhile, the government approved a ¥13.9 trillion ($92 billion) supplementary budget to shield households from rising living costs through measures such as fuel subsidies and disaster relief funding. However, this approach risks worsening Japan’s already immense public debt, which has grown more costly as the Bank of Japan (BOJ) shifts away from ultra-low interest rates.

Japan’s fiscal challenges are compounded by its reliance on debt-financed stimulus measures. The government faces the dual pressures of managing higher borrowing costs and addressing demands for permanent tax breaks, which could significantly reduce tax revenue. Analysts warn that prolonged fiscal expansion without adequate restraint could destabilize the country’s financial stability, especially as bond market dynamics shift and domestic banks remain cautious about returning to government debt markets.

The U.S. dollar began the week cautiously as markets brace for critical U.S. rate decisions, while the yen gained support from expectations of rising domestic interest rates. Markets estimate a 56% chance of a quarter-point hike by the BOJ in December. This strengthened the yen, with the dollar holding at 149.60 yen after last week’s significant 3.3% drop.

An uptick in the U.S. personal consumption expenditures price index to 2.3% in October complicates the Federal Reserve’s rate-cutting plans. While the labor market remains resilient, initial jobless claims fell to 213,000 last week, suggesting stable employment conditions.

The U.S. housing market faces affordability challenges despite slight gains in contracts for existing homes in October. High mortgage rates and tight inventory keep first-time buyers priced out. Meanwhile, orders for U.S. capital goods unexpectedly declined, signaling softer business spending on equipment.

The U.S. economy grew at an annualized 2.8% rate in Q3, driven by robust consumer spending, though inflation remains above the Fed’s 2% target. Analysts caution that persistent inflation and potential policy shifts may limit the scope of future rate cuts.

Despite strong economic growth, uncertainty surrounding future rate cuts and inflation control weighs on markets. Analysts foresee a period of consolidation for the dollar, with risks tilted in its favor for 2025. Upcoming data, including the November payroll report and Fed Chair Powell’s remarks, will influence the Federal Reserve's policy direction and market dynamics.

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

Resistance : 150.66, 150.70, 150.77

Support : 150.54, 150.50, 150.43

30Min Outlook  

Source: TradingView 

Buy/Long 1 If the support at the price range 150.44 – 150.54 is touched, but the support at 150.54 cannot be broken, the TP may be set around 150.69 and the SL around 150.39, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 150.66 – 150.76, TP may be set around 150.88 and SL around 150.49, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 150.66 – 150.76 is touched, but the resistance at 150.66 cannot be broken, the TP may be set around 150.52 and the SL around 150.81, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 150.44 – 150.54, TP may be set around 150.37 and SL around 150.71, or up to the risk appetite.       

Pivot Points Dec 2, 2024 03:02AM GMT