Japanese Yen rallies as upbeat data lifts BoJ hike bets

The USD/JPY pair declines for the second straight day – also marking the fourth day of a fall in the previous five – and sinks to its lowest level since February 18, around mid-153.00s during the Asian session on Tuesday. Japan's upbeat data reaffirms hawkish Bank of Japan (BoJ) bets and lifts the Japanese Yen (JPY), exerting heavy pressure on the currency pair amid a broadly weaker US Dollar (USD).

A government report showed earlier today that Japan's real wages climbed 2.4% in July from a year earlier, marking the biggest increase since May 2021 and the seventh consecutive month of rise. The inflation rate used by the labour ministry to calculate the real wages moved above 2% for the first time this year. Adding to this, revised data released by the Cabinet Office revealed that Japans economy expanded at an annualized rate of 1.4% during the April–June period, revised up from the preliminary estimate of 1.1%. This supports the case for the BoJ to raise interest rates next week and continue tightening thereafter.

Traders now seem to have fully priced in a 25 basis point (bps) rate hike at the September 17–18 BoJ meeting. Moreover, some analysts see the risk of a jumbo hike to anchor rising inflation expectations, cap long-end yields and ultimately support the JPY. Moreover, renewed speculation of another currency market intervention by Japanese authorities turns out to be another factor underpinning the JPY. The USD, on the other hand, attracts some follow-through selling, despite hawkish US Federal Reserve (Fed) expectations, and contributes to the heavily offered tone surrounding the USD/JPY pair and favors bears.

Against the backdrop of inflation risks stemming from elevated energy prices, the better-than-expected US Nonfarm Payrolls (NFP) report increased the chances of a Fed rate hike at the September 15-16 meeting. USD bulls, however, opt to wait for the release of the latest US inflation figures – the Producer Price Index (PPI) and the Consumer Price Index (PPI) on Thursday and Friday, respectively. This outweighs support from rising geopolitical tensions and validates the negative outlook for the USD/JPY pair, though oversold conditions warrant some caution before positioning for any further depreciating move.

The USD/JPY pair has slipped below the 155.30-155.20 horizontal support, keeping the near-term bias bearish and backing the case for an extension of the recent pullback from multi-decade highs. As sentiment shifts away from Yen weakness, any attempted recovery could be seen as a selling opportunity and remain capped near the said support breakpoint.