USD/JPY has posted slight losses in the Thursday session. In North American trade, the pair is trading at 110.40, down 0.25% on the day. On the release front, US unemployment claims edged lower to 240 thousand in July, beating the estimate of 242 thousand. ISM Non-Manufacturing is next, with the markets expecting the indicator to slow to 56.9 points. Later in the day, Japan releases Average Cash Earnings, which is expected to dip to 0.5%. On Friday, the US releases wage growth and non-farm payrolls, so traders should be prepared for some movement from USD/JPY.
Japan’s economy has shown improvement, but the Japanese consumer remains pessimistic about economic conditions. Consumer Confidence moved higher in July, with a reading of 43.8 points. This marked a 4-month high. The lack of confidence in the economy has resulted in soft borrowing and spending levels. At the same time, manufacturing and housing indicators looked sharp earlier this week. Preliminary Industrial Production rebounded with a strong gain of 1.6%, after a decline of 3.3% a month earlier. As well, Housing Starts gained 1.7%, compared to a reading of -0.3% in May. These numbers underscore a stronger Japanese economy, buoyed by stronger demand for Japanese exports. However, weak inflation levels remain a serious concern. The BoJ’s ultra-loose monetary policy has failed to coax inflation upward. At its recent policy meeting, the BoJ again extended its time-frame for reaching its inflation target of 2%. The bank is reluctant to scale back its asset-purchase program, which means that it will likely lag behind other central banks, such as the ECB, in reducing its stimulus program.
Earlier in the year, the Federal Reserve all but promised to raise interest rates three times in 2017. However, the Fed has pressed the rate trigger only twice, and a third hike remains in doubt, with current odds under 50%. Inflation has remained stubbornly low, despite a strong labor market. In June, Fed Chair Janet Yellen said that factors causing weak inflation were "transient", but there are no signs that inflation will pick up anytime soon. With the Federal Reserve unlikely to raise rates before December, investor attention has shifted to the Fed’s balance sheet, which stands at $4.2 trillion. Fed policymakers have broadly hinted at reducing purchases of bonds and securities starting in September, but San Francisco Fed President John Williams was more forthcoming about the Fed’s plans, likely aimed at giving notice to the markets. In a speech on Wednesday, Williams said that the economy had "fully recovered" from the 2008 financial crisis and called on the Fed to start trimming the balance sheet "this fall". Williams added that the process would be gradual and would take four years to reduce the balance sheet to a "reasonable size". On Wednesday, two other FOMC members also came out in support of starting to taper the balance sheet – St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester.
