USD/JPY eyes bullish breakout as Japan economy deteriorates

Written by: Crispus Nyaga
January 22, 2021
  • The USD/JPY has formed a bullish flag pattern after the weak economic data from Japan.
  • The services and manufacturing PMI dropped in January because of the state of emergency.
  • Inflation dropped in December and is below the BOJ target of 2.0%.

The USD/JPY is rising after the relatively weak economic numbers from Japan and the overall strength of the US dollar. It is trading at 103.77, which is slightly higher than the week-to-date low of 103.30.

USD/JPY price action

Japan economic weakness

The Japanese economy is set for a double-dip recession because of the ongoing state of emergency aimed at curtailing the pandemic. 

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According to Markit, the country’s manufacturing and services PMIs dropped to 49.7 and 45.7, respectively in January. The two were at 50 and 47.2 in December.

In the statement, the survey attributed this weakness to the rising number of coronavirus cases and the measures the government has put in place. This month, the government extended its state of emergency measures to most of the prefectures. 

Therefore, the weakness implies that the recovery most economists were expecting will not happen. They also mean that the country’s unemployment rate could continue rising.

Earlier on, the USD/JPY also reacted to the relatively weak inflation numbers from Japan. The headline consumer prices declined by 1.2% in December from the previous -0.9%. Similarly, the core CPI fell from -0.9% to -1.0%. These numbers are below the 2% Bank of Japan (BOJ).

The weak inflation and CPI data came a day after the BOJ delivered its interest rate decision. The bank left its interest rate, quantitative easing, and yield-curve control program unchanged. It also lowered this year’s economic forecast because of the new wave of the virus.

The USD/JPY is also rising because of the stronger dollar after other disappointing economic numbers. In Europe, the manufacturing and services PMIs declined while in the UK, the public debt continued to rise.

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USD/JPY technical outlook

USD/JPY technical chart

Early this week, I used the daily chart to forecast that the USD/JPY would jump to above 105. That did not happen. Still, the four-hour chart shows that this trend could indeed happen in the near term.

The chart shows that the pair rose sharply early this month to a high of 104.38. However, the pair has since then formed a bearish flag pattern that is shown in purple. As you can try in a forex demo account, this pattern is usually a bullish consolidation. Therefore, there is a likelihood that it will break-out above the upper line in the near term.