Japan's Economy Shows Signs of Recovery Amid Inflation and Wage Pressures

Japan's economic landscape continues to show mixed signals, influencing the Bank of Japan's (BOJ) monetary policy considerations. The yen steadied just below a six-month high, as reports suggest the BOJ might raise inflation forecasts and consider a rate hike soon. This speculation is fueled by rising inflation pressures, including a December Tokyo CPI increase to 2.4%, slightly below expectations but higher than November's 2.2%. Core inflation excluding energy and fresh food remains below the BOJ's 2% target for the ninth consecutive month, potentially limiting aggressive rate hikes.

Wage dynamics add another layer of complexity. Japan's real wages fell 0.3% in November, marking the fourth consecutive decline despite base pay growth at its fastest pace in three decades. Structural labor shortages and rising living costs have driven firms to raise wages, with more widespread increases expected in 2025. The BOJ emphasizes sustained wage growth as a prerequisite for further tightening, citing broader pay hikes across large and small firms. Consumer sentiment and spending remain under pressure, with households cutting discretionary expenses amid higher inflation and a weaker yen.

On the production side, factory activity showed signs of stabilization in December, with the manufacturing PMI inching closer to neutrality at 49.6. While production and new orders contracted for the fourth straight month, the pace of decline slowed. Service-sector activity expanded for a second consecutive month, driven by domestic demand and rising service prices, which align with the BOJ's focus on achieving stable inflation. Retail sales also exceeded expectations in November, growing 2.8% year-on-year, underscoring resilient consumer demand in certain segments.

Japan is poised for a pivotal fiscal year marked by economic recovery, record budgets, and shifting monetary policies. The government anticipates its economic output will surpass full capacity for the first time in seven years, supported by a tight labor market that limits supply. The output gap, predicted at +0.4%, reflects strong demand, though labor shortages and a plateaued workforce of 69 million pose challenges.

Amid this economic recovery, the government approved a record 115.5 trillion yen ($730 billion) budget for the next fiscal year, driven by surging social security and debt-servicing costs. Record tax revenues—projected at 78.4 trillion yen—allow for a reduction in new bond issuance to 28.6 trillion yen, the lowest in 17 years, bringing the debt dependence ratio below 30% for the first time since 1998. The primary budget balance deficit is expected to narrow, keeping alive hopes of a surplus by the next fiscal year.

Governor Kazuo Ueda remains cautiously optimistic about achieving the BOJ's 2% inflation target sustainably. While the BOJ maintained rates in December, speculation mounts over a potential hike at the upcoming Jan. 23-24 meeting. A Reuters poll predicts the policy rate could rise to 0.5% by March 2025, as the central bank balances inflationary pressures, wage dynamics, and global economic uncertainties.

The U.S. dollar surged following robust December job growth, underscoring the Federal Reserve's likely pause in its rate-cutting cycle. Nonfarm payrolls grew by 256,000, far exceeding forecasts of 160,000, while the unemployment rate fell to 4.1%, signaling labor market strength. Average hourly earnings rose by 0.3% month-on-month, reflecting a 3.9% annual increase.

The Fed has hinted at delaying further rate cuts, emphasizing caution amid uncertainties surrounding President-elect Donald Trump's trade and economic policies. Minutes from the Fed's latest meeting revealed concerns over prolonged inflation pressures driven by potential tariffs and immigration restrictions. Market expectations now point to just one rate cut in 2025, likely in October, as the Fed awaits clearer signals on inflation and wage trends.

Investors will scrutinize upcoming inflation data, particularly the Consumer Price Index, which is expected to show a 2.9% year-over-year increase. The Fed has maintained its 2% inflation target but acknowledges that Trump's policies could delay achieving this goal. Meanwhile, Treasury yields surged, and equities retreated, reflecting market adjustments to the revised monetary policy outlook.

However, the U.S. Dollar Index hit 109.91, its highest since November 2022, signaling that the "Trump Trade" might have peaked. Analysts argue this strength is unsustainable, as tightening U.S. financial conditions and global economic risks could temper the dollar's rally.

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

Resistance : 157.76, 157.90, 158.13

Support : 157.30, 157.16, 156.93

1H Outlook

Source: TradingView 

Buy/Long 1 If the support at the price range 157.14 – 157.30 is touched, but the support at 157.30 cannot be broken, the TP may be set around 157.79 and the SL around 157.06, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 157.76 – 157.92, TP may be set around 158.87 and SL around 157.22, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 157.76 – 157.92 is touched, but the resistance at 157.76 cannot be broken, the TP may be set around 157.19 and the SL around 158.00, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 157.14 – 157.30, TP may be set around 156.49 and SL around 157.84, or up to the risk appetite.       

Pivot Points Jan 13, 2025 02:12AM GMT