USD/JPY prediction after strong Japan inflation data

The USD/JPY exchange rate remained under pressure on Friday after Japan released the latest consumer inflation data. It rose slightly to 150.55 on Friday morning, a few points above this month’s low of 149.3. So, what next for the Japanese yen?

Japan inflation and PMI data

The USD/JPY exchange rate rose slightly after the latest Japanese inflation numbers raised the odds of higher Bank of Japan (BoJ) hikes.

According to the statistics agency, the headline consumer price index (CPI) rose from 3.6% in December to 4.0% in January, the highest point in years.

Core inflation, which excludes the volatile food and energy prices, rose from 3.0% in December to 3.2% in January, beating the median estimate of 3.1%.

These numbers mean that Japan’s inflation is rising at a faster pace than expected, which may put the BoJ to embrace more hawkish view.

More data showed that Japan’s economy was improving as the flash services PMI rose from 53 to 53.1 and the manufacturing figure rose from 48.7 to 48.9. While the manufacturing PMI figure was lower than estimates, it is a sign that it is making improvements.

BoJ interest rate hikes

The latest Japan inflation and PMI data is a sign that the BoJ may maintain its higher interest rate policy for longer. 

The bank has been highly hawkish this year as it boosted interest rates by 0.25% in the last meeting. It did that because inflation was much higher than expectations and that the economy was doing relatively well.

The hawkish BoJ explains why the USD/JPY exchange rate has pulled back in the past few weeks. It has dropped from 158 earlier this year to sub-150 onn Thursday.

A currency gains when interest rates rise because they incentivize investors to move to local government bonds. In Japan’s case, the 10-year Japan Government Bond yield has moved from the negative zone to 1.4%. 

A key concern for the Japanese economy is the potential tariffs by Donald Trump. He has already signaled that steel and aluminum tariffs will start in March and that more were coming.

Hawkish Federal Reserve

The USD/JPY exchange rate’s sell-off has been offset by the hawkish Federal Reserve and the strong US inflation data.

Minutes released this week showed that most officials supported the decision to pause interest rate cuts. These officials worried that Donald Trump’s tariffs would affect the US economy substantially by stimulating inflation. 

The minutes were notable because the meeting happened before the US published the latest inflation data. According to the Bureau of Labor Statistics (BLS), the headline consumer price index (CPI) rose from 2.9% in December to 3.0% in January, while the core CPI rose from 3.2% to 3.3%.

Therefore, the USD/JPY crash has been moderated because some analysts expect the Fed to either maintain rates steady. Other analysts see the bank hiking interest rates by 0.25% later this year.

USD/JPY forecast

USDJPY chart by TradingView

The daily chart shows that the USD/JPY pair has been in a steady downward trend after peaking at 158 earlier this year. This decline was in line with our previous USDJPY forecast.It briefly moved below the key support at 150 on Thursday and then crawled back after the Japan inflation and manufacturing data. 

The pair has slipped below the 50-day and 200-dat Exponential Moving Averages (EMA), a sign that bears are in control. Further data shows that the Relative Strength Index (RSI) and the MACD indicators have pointed downwards.

Therefore, the pair will likely continue falling as sellers target the key support at 145. A crash below 145 will point to further USD to JPY drop to the important support level at 139.50. The bearish view will become invalid if the USD/JPY pair moves above the 200-day EMA level at 152.