USD/JPY set for a breakout after weak Japan inflation data

The USD/JPY price was in a tight range on Friday morning as investors continued to reflect on the weak Japanese inflation and the tightening labour force in the United States. The pair is trading at 108.85, which is slightly below this week’s high of 109.75.

Japan weak inflation

In the past few weeks, several countries have reported strong consumer inflation data. In the United States, the headline consumer inflation rose by 4.2% in April as prices of most items rose. This week, data by the Office of National Statistics (ONS) revealed that the UK consumer price index more than doubled in April. Similarly, the Eurozone also published strong CPI numbers.

Japan is different. According to the statistics agency, the headline consumer inflation index declined from 0.2% in March to -0.4% in April. On a year-on-year basis, the headline CPI declined from -0.2% in March to -0.4% in April.

Japan’s core CPI that scraps the volatile food and energy prices also did worse. The CPI fell from -0.1% in March to -0.1% in April. It also fell to -0.3% on a year-on-year basis.

There are several reasons for this divergence. First, the country has an aging population that does not spend much on discretionary items. Second, the country’s companies tend to be highly cautious about passing higher costs to consumers, unlike in the United States. In a note, analysts at Mitsubishi UFJ wrote:

“Raising prices now could be a fatal mistake for Japanese companies even with soaring commodity prices. It’s a very different situation from the U.S.”

The USD/JPY reacted mildly to the inflation data. For one, in the past BOJ interest rate decision, Governor Kuroda warned that it will be difficult for the country to reach the 2.0% inflation target.

The USD/JPY also reacted to relatively strong manufacturing PMI data from Japan. According to Markit, the manufacturing PMI came in at 52.6 in May. 

USD/JPY technical outlook

The four-hour chart shows that the USD/JPY pair has been in a tight range recently. The pair is trading at 108.85, where it has been in the past few days. Also, it has formed a giant triangle pattern that is shown in green. It is also slightly below the 25-day and 15-day exponential moving averages. Therefore, with the confluence of the triangle pattern nearing, there is a possibility that the pair will soon have a breakout in either direction.