USD/JPY – Will wage growth shake up the Japanese yen?

The Japanese yen is drifting at the start of the week. In the North American session, USD/JPY is trading just under the 136 line.

Japan’s wage growth expected to slow

Japan will release Average Cash Earnings for January later today. The wage growth indicator surged 4.8% y/y in December and is expected to slow to 1.9% in January. The sharp jump in December was likely a one-time bump, driven in large part by December bonuses.

Wage growth is a key factor in the Bank of Japan’s ultra-loose policy. Governor Kuroda has said that he will not tighten policy, despite rising inflation, until there is evidence that inflation is being driven by wage growth rather than external factors such as commodity prices. Kuroda will chair his final policy meeting on March 10. Barring a huge surprise, Kuroda is expected to maintain policy and not make any changes to the yield control curve (YCC).

BoJ Governor-elect Kazuo Ueda takes over from Kuroda in April and has stated has his confirmation hearings that current policy is appropriate. Still, Ueda will be under pressure to tweak the YCC which continues to cause bond market distortion and he could make a change in policy as early as his first policy meeting in April.

Federal Reserve Chair Powell will testify before Congress on Tuesday and Wednesday, and inflation will be the hot topic. The Fed’s aggressive rate-hike cycle has led to inflation dropping for seven straight months, and Powell acknowledged last month that the “disinflation” process had finally started. What has complicated matters is a string of better-than-expected releases, notably a sizzling nonfarm payrolls of 517,000 in January. Consumer spending has remained strong and Friday’s ISM Services PMI came in at 55.1 in February, which indicates strong expansion. How will the Fed respond to an economy that is performing better than expected? The markets hope to get some answers this week from Powell’s testimony on the Hill.

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USD/JPY Technical

• 136.06 is a weak resistance line, followed by 136.86
• 135.02 and 134.22 are providing support

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