Monthly Japanese yen fundamental forecast

Is there a correlation between faster wage growth and faster inflation？ Conversely, do high prices trigger workers to demand higher wages, resulting in employers eventually agreeing？ The Bank of Japan asserts that the former is true. In Japan, inflation has consistently surpassed the 2% target for 19 consecutive months, yet Kazuo Ueda and colleagues remain steadfast in their commitment to the policy of negative rates.

In October, consumer prices, excluding volatile spending on fresh food, accelerated to 2.9% from 2.8%. Reuters experts expected them to grow by 3%, which, coupled with the first slowdown in core inflation below 3% since August 2022 in September, put pressure on the yen. However, one report is clearly not enough to change the trend. Global inflation is permeating Japan's economy, and the BoJ has no choice but to normalize monetary policy.

85% of Reuters experts predict that the Bank of Japan will move away from negative rates in 2024. This is up from 63% in the October survey and 52% in September. At the same time, 12 out of 22 experts who voted for the next year chose April as the first month of monetary tightening. Two chose June, three – July and one – October. Four respondents even believe that BoJ will raise the interest rate in January.

I don't think it will happen so soon. Kazuo Ueda made it clear that monetary policy adjustments depend on rising wages. Nomura forecasts that pay will accelerate from 3.6% in 2022/2023 to 3.9% in the 2023/2024 financial year, pushing the central bank towards normalization.

In fact, the monetary normalization is going on. The Bank of Japan is moving forward in small steps. The Japanese regulator expanded the 10-year yield target range, first to +/-0.5%, then to +/-1%. Then, it made the target yield range flexible. Moreover, the regulator has almost stopped buying ETFs as part of the quantitative easing policy.

Dynamics of BoJ buying of ETFs

Thus, there are many signs that 2024 will be a landmark year for Japan and its currency. The BoJ is taking the path of normalizing monetary policy at a leisurely pace, fully aware of the consequences of a rapid step for financial markets and the global economy as a whole. If the regulator abandoned the policy of negative rates right away, the repatriation of capital by Japanese investors would be a real tsunami for various asset classes.

Monthly USDJPY trading plan

The Bank of Japan has chosen its path, which puts the yen as the main Forex favorite next year. While other central banks, including the Fed, will weaken monetary policy, BoJ will tighten it. Divergence allows one to safely sell the USDJPY towards the previously suggested targets at 146 and 142.5. The current descending correction provides a good opportunity to sell the pair.