USD/JPY forecast: monthly chart points to a deeper yen crash

The Japanese yen’s sell-off is accelerating this week as concerns about the Bank of Japan (BoJ) actions remain. The USD/JPY pair has risen for five straight weeks and is hovering at its highest point in over 38 years. It has jumped by over 60% from its lowest point in 2020 and by 115% from its 2011 lows.

Why the Japanese yen is collapsing

The Japanese yen has collapsed in the past decade because of the actions of the Japanese government and the central bank.

Over the years, especially during the Covid-19 pandemic, the Japanese government borrowed heavily to save the economy. As a result, the total debt has jumped to over $9 trillion, higher than the country’s GDP.

This trend has left the central bank and the government at a precarious problem as the deficits continue. To bridge these deficits, the government can cut spending and raise taxes, two highly unpopular strategies. Besides, the current prime minister has one of the lowest approval ratings in Japan’s history.

The Bank of Japan is also at a difficult place since any rate increases will increase the debt servicing costs. That explains why it only hiked interest rates by just 10 basis points earlier this year. 

It is unlikely that the BoJ will hike rates again this year. If it does, it will only hike by less than 0.25%. At the same time, evidence shows that government interventions in the forex market rarely work. 

The BoJ intervened by pumping billions of dollars in the forex market in 2022. Despite doing that, the USD/JPY pair continued rising in that period. The same happened this year when the central bank pumped billions of dollars as the yen crashed. 

US inflation data ahead

The next important catalyst for the USD/JPY exchange rate will be from the United States, which will publish the latest inflation data on Thursday.

These are important numbers because they will have an impact on the Federal Reserve. Economists expect the data to show that the headline Consumer Price Index (CPI) slowed to 3.2% in June. The core CPI is expected to come in at 3.4%.

If these numbers are correct, they will mean that inflation is still at an elevated level and any rate cuts will likely lead to higher prices for longer. 

In a statement this week, Jerome Powell noted that the Fed was open to rate cuts if inflation continues falling. 

The challenge for the Fed is that it will find itself where the BoJ is today since US government spending and debt are rising. Data shows that the debt has jumped to over $34.8 trillion and the annual interest costs have soared to over $880 billion. 

USD/JPY technical analysis

Looking at the monthly chart, we see that the USDJPY exchange rate has been in a strong bull run in the past few years. It has crossed the key resistance at 125.72, the upper side of the inverse head and shoulders pattern. 

It also jumped above 148.44, its highest level in 1999 before the dot com bubble burst. The pair has also formed a golden cross pattern as the 50-day and 200-day Exponential Moving Averages (EMA) crossed each other. 

It has also moved above the 23.6% Fibonacci Retracement level. Therefore, the USD/JPY pair will likely continue rising in the coming years as buyers target the 38.2% retracement point at 182.60. This price is about 12% above the current level. 

A move above that level could see it rise to the psychological point at 200, which is about 235 above the current level.