USD/JPY: Yen at an 8-week high after weak Japan inflation data

The USD/JPY price is hovering near its lowest level since March 5 after the weak Japan inflation and strong manufacturing PMI data. It is trading at 107.95, which is 2.73% below the highest level on March 31.

Japan weak inflation

Japan has an inflation problem. In the past few years, the country’s annual consumer inflation data has failed to move above 1.5%. Its highest inflation was in February 2018 when it rose to 1.5%. This performance is partly because of the country’s demographics, where the population is aging, meaning that people are not spending enough.

Japan moved into deflation in 2020 amid the coronavirus pandemic. This saw the headline consumer price index (CPI) dropping to a multi-year low of -1.2%. Since then, it has attempted to rebound. In March, the headline CPI increased from 0.1% in February to 0.2% in March. On a year-on-year basis, inflation improved from -0.4% to -0.2%. In the same period, core CPI improved from -0.4% to -0.1%.

While consumer prices have made some improvement, they are still struggling and are significantly below the Bank of Japan (BOJ) target of 2%. As such, it means that the bank will have a difficult time increasing interest rates in the near term. In contrast, in the United States, the headline CPI rose to 2.6% in March.

The USD/JPY price is also reacting to the improving manufacturing sector. According to Markit, the manufacturing PMI increased from 52.7 in March to 53.3 in April. This was the highest it has been since 2018 and is significantly higher than last year’s low of 37.8. The manufacturing figures are notable since Japan is well-known for its manufacturing sector.

USD/JPY technical forecast

The USD/JPY pair is trading at 107.95. On the four-hour chart, the pair is below the 25-day and 15-day moving averages. As you will find in our forex trading course, this is usually a sign that the downward trend is still intact. The two lines of the MACD have started to form a bullish divergence pattern. Similarly, the Relative Strength Index (RSI) is hovering slightly above the oversold level of 30. The path of least resistance for the pair is downwards as bears target the next key support at 107.