Japan’s economy shows signs of struggling. Following weaker GDP, retail sales, and industrial production data, the government downgraded its view on the economy and stated that the recovery is stalling. Today’s PMI data seems to be in line with the government’s downgrade. Although staying above 50, the composite PMI fell to 50.3, still clearly indicating a downtrend. Manufacturing PMI fell as low as 47.2.
(Japan Composite PMI)
While the recovery is clearly stalling, Ueda signals confidence in the prospect of stable inflation. Ueda said that a “virtuous economic cycle” will gradually increase inflation through rises in wages and strengthened employment. With the latest positive comments from Ueda, market expectations of ending the negative rate in April have surged to near 80%. The market is pricing in three rate hikes in 2024 with a 61% probability.
(USDJPY Daily Chart)
Despite possibly overly optimistic rate hike expectations, USDJPY is still in a clear uptrend since the start of 2024. Over the last one and a half years, USDJPY has formed a cup and handle formation below the key 152 level. As the price continues to rise, the 152 resistance and the shorter-term uptrend channel seem to be on a collision course. 152 is a strong resistance; moreover, the government and BOJ do not want JPY to extend beyond 150 too much.
Whenever USDJPY gets close to 152, talks of intervention, and sometimes actual interventions, begin. Yen bears might be watching for a breakout above 152 and a move towards 155 in the coming days as key March central bank meetings are just weeks away. As for downward moves, 149 might provide strong support in the short term. Below 149, upward momentum might start to wane.
