USD/JPY forecast as Japan inflation remains stubbornly low

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his… read more.
on Oct 22, 2021
  • The USD/JPY pair has jumped to the highest level since October 2018.
  • Japan published relatively weak inflation data on Friday.
  • The headline and core consumer inflation rose to 0.2% in October.

The USD/JPY price held steady at a multi-year high after the latest Japan consumer price index (CPI) data. The pair is trading at 114.08, which is slightly below its highest level in October 2018. It has jumped by more than 11% from its lowest level this year.

Japan inflation data

Japan has managed to defy the Philips law, which says that inflation rises when the unemployment rate falls. Data published by the country’s statistics agency showed that the headline consumer inflation rose from -0.2% in August to 0.2% in September. On a year-on-year basis, the CPI jumped from -0.4% to 0.2%. 

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Meanwhile, core CPI, which excludes the volatile food and energy prices, rose from fron-0.2% to 0.1%. These numbers are substantially lower than the Bank of England (BOE) target of 2.0%. They are also the lowest inflation figures globally.

The data show that the country’s inflation has not been affected by the recent surge in commodity prices. For example, in a statement, the Bank of England (BOE) Chief Economist warned that the country’s inflation could rise to 5.0%. Similarly, the US consumer price index rose to 5.4% in September.

Japan’s inflation has remained stubbornly low even as the country’s unemployment rate has remained low. Recent data showed that its unemployment rate declined to 2.9% in September, among the world’s lowest.

Therefore, the USD/JPY pair has declined sharply because investors expect that the Bank of Japan (BOJ) will maintain its interest rates low for longer. 

Meanwhile, data by Markit showed that manufacturing activity in Japan rebounded in October. The manufacturing PMI rose from 51.5 to 53.0. Later today, the USD/JPY will react to the latest US inflation data.

USD/JPY forecast

USD/JPY

The daily chart shows that the USD/JPY pair has been in a major bullish trend in the past few months. The bullish trend accelerated after the pair moved above the key resistance level at 111.65, which was the upper side of the horizontal channel shown in black. 

It also moved above the 25-day and 50-day moving averages. The MACD has also risen to the highest level in months. Therefore, the USDJPY will maintain its bullish trend as bulls target the next key resistance at 112.50.

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