BOJ Signals Patience as Inflation Rises and Yen Weakens

The Bank of Japan (BOJ) maintained its benchmark interest rate at 0.25% in a cautious approach, reflecting lingering uncertainties over U.S. president-elect Donald Trump's economic policies and global market risks. The decision, largely expected, came despite mounting inflationary pressures and dissent from board member Naoki Tamura, who proposed a rate hike to 0.5%, highlighting concerns about rising prices.

Governor Kazuo Ueda emphasized the need for more data, particularly on wage growth and inflation sustainability, before considering further rate adjustments. This stance was perceived as dovish, pushing the yen to a multi-month low and dampening expectations of a near-term rate hike, with markets now eyeing decisions in January or March.

Meanwhile, Japan’s inflation continues to rise, fueled by higher food and energy costs, and November’s 2.7% core CPI—above the BOJ’s 2% target—points to persistent price pressures. The weakening yen exacerbates import costs, adding to inflationary momentum. Yet, the BOJ views wage growth as a critical factor in achieving durable inflation, making spring wage negotiations a pivotal event for future policy direction.

Economic data reveal a mixed outlook—exports surged 3.8% in November, supported by a weaker yen, but factory activity remained in contraction for the sixth straight month, signaling weak domestic demand. The government reported moderate recovery but flagged risks from global trade tensions, higher U.S. interest rates, and slowing growth in China, underscoring Japan’s vulnerability to external shocks.

The BOJ also released a review of its unconventional monetary easing measures, acknowledging their limitations and side effects, such as market distortions. Looking ahead, the BOJ’s decisions will hinge on wage growth sustainability, the impact of government subsidies, and external economic developments, particularly U.S. policy shifts under Trump. While inflation trends support rate hikes, the BOJ’s cautious tone highlights a preference for stability amid lingering uncertainties.

The U.S. economy continues to demonstrate resilience, bolstered by strong consumer spending and stable investment trends, while analysts adopt a more measured outlook on monetary policy and fiscal constraints.

The dollar has surged to fresh year-to-date highs, supported by the Federal Reserve’s unexpectedly hawkish stance during its December meeting. UBS analysts now expect the greenback to retain strength, though they foresee only modest depreciation in 2025 amid fewer anticipated rate cuts and lingering tariff risks. Goldman Sachs similarly adjusted its forecasts, pushing back the timeline for rate reductions, now projecting cuts in March, June, and September, with the terminal rate expected to settle between 3.5-3.75%.

Consumer spending increased in November, signaling sustained economic momentum. Inflation, while moderating, remains above the Fed’s 2% target, with core prices posting their smallest monthly gain in six months. Concerns persist that fiscal stimulus, tariff adjustments, and immigration policies under President-elect Donald Trump’s administration could reignite inflationary pressures, complicating the path for monetary easing.

Meanwhile, U.S. companies increased borrowing by 8.7% in November to finance equipment investments, reflecting confidence in long-term growth despite higher interest rates. However, structural constraints limit fiscal flexibility. With mandatory spending—covering Social Security, Medicare, and Medicaid—dominating expenditures, and defense budgets unlikely to shrink given geopolitical tensions, meaningful fiscal tightening remains improbable.

Goldman Sachs forecasts U.S. real GDP growth at 2.6% in 2025, underpinned by strong income growth and productivity gains. Core inflation is expected to ease to 2.4% by year-end, driven by softer shelter costs and wage pressures. Nevertheless, global economic risks, particularly in the Eurozone and China, pose challenges to sustained momentum.

Data for Technical Analysis (1H) CFD USD/JPY

Resistance : 156.63, 156.71, 156.85

Support : 156.37, 156.29, 156.15

1H Outlook  

Source: TradingView

Buy/Long 1 If the support at the price range 156.17 – 156.37 is touched, but the support at 156.37 cannot be broken, the TP may be set around 156.65 and the SL around 156.07, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 156.63 – 156.83, TP may be set around 157.14 and SL around 156.27, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 156.63 – 156.83 is touched, but the resistance at 156.63 cannot be broken, the TP may be set around 156.30 and the SL around 156.93, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 156.17 – 156.37, TP may be set around 155.95 and SL around 156.73, or up to the risk appetite.       

Pivot Points Dec 23, 2024 02:18AM GMT