In August, Japanese wage growth exceeded expectations, yet the Yen weakened. Currently, USD/JPY is around 158.00, retracing to levels seen prior to its rise following the wage data release, marking its highest point since September 25.
Nominal wages increased by 3.8% year-on-year, slightly above the anticipated 3.7%, though this figure has decreased from July’s rates. Moreover, real wage growth has slowed for the second consecutive month to 1.5%. Interestingly, the figures for July were adjusted downwards from 4.7% to 4.3%, which is a significant revision compared to the modest beat in August.
The Bank of Japan (BoJ) argues that wages outpacing prices supports their case for further interest rate hikes. However, this slowing trend has not advanced the timing of their next potential increase. As a result, USD/JPY has largely trended in line with the dollar throughout October.
Japan Addresses Yen’s Valuation with Tax Cuts
On Tuesday, Prime Minister Takaichi informed the parliament about plans to reduce the consumption tax on food, which would be executed without the issuance of new bonds. Meanwhile, Japan’s 10-year government bond yield lingered near 3.11% on Wednesday, maintaining levels close to its peak over the past thirty years. Increases in yields driven by budgetary concerns can lead to currency depreciation rather than strengthening.
Late in September, both Finance Minister Katayama and U.S. Treasury Secretary Bessent expressed worries regarding the Yen’s undervaluation. Minutes from the Federal Open Market Committee (FOMC) on Wednesday noted the New York Federal Reserve’s currency intervention for the Treasury, involving yen purchases made on July 31 when USD/JPY was just below 164.00. Using the term ‘undervalued’ is indicative of the two finance ministries regarding a currency they have previously invested in.
BoJ’s Rate Puzzle
Following the rate hike on September 18, the BoJ’s rate stands at 1.25%, while the Fed’s ranges from 3.75% to 4.00%. Futures are currently pricing in about a 71% probability that the BoJ will take further action by December. The odds for hikes from both the Fed on October 28 and the BoJ on October 30 sit at approximately 17%.
On Friday, the University of Michigan’s survey is set to be released at 14:00 GMT, which will include U.S. households’ inflation expectations for the upcoming year, previously recorded at 4.6%. If expectations rise, it could bolster the case for a Fed rate increase and uplift USD/JPY accordingly.
Yen Relativity to Moving Averages
As for resistance levels: Wednesday’s high, just above 158.50, marked the peak since September 25 before retreating. The 159.00 level halted a rebound during September.
Support lies at the 200-day Exponential Moving Average (EMA), just beneath 158.00, which has not been exceeded in daily closes since October 1. The low from Monday, slightly under 157.50, indicates a key level holding with significance.
Current sentiment remains optimistic while support at 157.50 is intact for daily closures, with 158.50 being the primary target and 159.00 following as the next. The Stochastic Relative Strength Index (Stoch RSI) has declined on daily charts from around 85 to near 80, suggesting a potential move toward 157.50 aligns with expectations. Conversely, a daily close below 157.00 would eliminate long positions.
