After little movement this week, USD/JPY has posted losses in the Wednesday session. In North American trade, USD/JPY is trading at 113.06, down 0.43% on the day. On the release front, Japanese Core Machinery Orders posted a strong gain of 5.0%, beating the estimate of 3.1%. In the US, inflation numbers were a mix. CPI improved to 0.4%, matching the forecast. However, Core CPI, which excludes volatile items such as food and energy prices, edged lower to 0.1%, missing the estimate of 0.2%. Later in the day, the Federal Reserve is expected to raise rates to a range between 1.25% to 1.50%. As well, the US releases CPI reports. On Thursday, the US releases retail sales reports and unemployment claims, while Japan will publish the Tankan indices.
Will the Federal Reserve press the rate trigger on Wednesday? The CME Group has priced in a quarter-point rate hike at 87%, so it would be a huge surprise if the Fed doesn’t raise the benchmark rate. Even though this move has been priced in, rate hikes tend to trigger a surge of confidence among investors, and a rate hike could boost global stock markets. Today’s move could be the start of a series of incremental hikes, as the odds of a January increase stand at 86%. The Fed has hinted that it could raise rates up to three times in 2018, but the pace of increases will depend to a great extent on the strength of the economy and inflation levels. The US labor market remains at full capacity and various sectors in the economy are reporting a lack of workers. Still, this has not translated into stronger wage growth, despite predictions from Janet Yellen and other Fed policymakers that a lack of workers is bound to push up wages.
The Bank of Japan’s ultra-accommodative stimulus program has failed to push inflation higher, as the BoJ’s inflation target of 2 percent remains elusive. However, the program has led to a sharp depreciation in the yen. This has led to sharp denunciations from the US and other countries, and the criticism that the Bank was manipulating the yen was especially sharp when the dollar rose to around 120 yen. A weak yen has been a boon for exports and helped revive the manufacturing sector. A chief economist at the NLI Research Institute went as far as saying that the low yen has been a major accomplishment for the BoJ. According to this view, the BoJ is reluctant to signal the possibility of a taper of stimulus, since that could trigger a sharp rise in the yen. Clearly, the BoJ is closely following yen fluctuations, and currency movement will continue to be an important factor for the BoJ.
