Yen dips, inflation expectations rise

After several days of gains, the Japanese yen has reversed directions and is in negative territory. In the North American session, USD/JPY is trading at 115.48, up 0.23% on the day.

Japanese consumers expect higher inflation

The Japanese government is committed to an ultra-easy monetary policy, but it will need stronger consumer spending if it hopes to kickstart the economy. November’s consumer spending data was weak, as Household Spending declined by -1.3% y/y, the first drop in three months and defying expectations of a 1.2% gain.

At the same time that consumers are holding off on spending, inflation has been moving higher. Certainly not at the dizzying pace we are seeing in the US and the UK, but for Japan, which has grappled with deflation for decades, rising inflation is a new phenomenon. A BoJ survey released today showed an increase in the number of Japanese households that expect higher inflation next year and in five years’ time. This is significant because inflation expectations often translate into higher inflation.

The Federal Reserve has turned more hawkish, and markets participants are consumed with the burning question of whether the Fed plans to raise rates three times or four times in 2022. This aggressive stance has raised speculation that we could see a lift-off for higher rates as early as March, and has also boosted US Treasury yields. The 10-year yield punched above 1.80% on Monday, and it seems only a matter of time before it reaches the 2% level. The widening US/Japan rate differential has been weighing on the yen, which is extremely sensitive to the rate differential. If US yields remain high, we could see USD/JPY break past the 118 mark over the coming weeks.

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USD/JPY Technical

• USD/JPY faces resistance at 116.29. Above, there is resistance at 117.02, which has held since January 2017
• There is support at 114.89 and 114.22

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