The Japanese yen has posted gains in the Thursday session, after little movement on Wednesday. In North American trade, USD/JPY is trading at 109.37, down 0.42% on the day. On the release front, unemployment claims edged up to 211 thousand, easily beating the estimate of 225 thousand. In the services sector, ISM Non-Manufacturing PMI dropped for a third straight month, coming in at 56.8 points, above the estimate of 56.1 points. There are no Japanese events, as Japan is closed for a holiday. On Friday, the focus is on US employment data, with the release of wage growth, nonfarm payrolls and the unemployment rate.
As expected, the Federal Reserve maintained the benchmark rate at a target of 1.5% to 1.75% on Wednesday. The rate statement was significant, with policymakers noting that “overall inflation has moved closer to 2 percent”. This was more hawkish than the March statement, which said that inflation indicators “have continued to run below 2 percent”. With inflation moving closer to the Fed target of 2 percent, there is a stronger likelihood that the Fed will upgrade its rate projection from three to four hikes in 2018. The odds of a fourth rate hike this year stand at 50%. The Fed rate statement also noted that “market-based measures of inflation compensation remain low”, a reference to soft wage growth, which is at 2.7%, lower than the 3% rate that the Fed would like to see.
Japan’s economic recovery has been impressive, as the economy has expanded for eight consecutive quarters, its longest streak since the 1980s. At the same time, the economy experienced a slowdown in the first quarter of 2018. Annualized growth in Q4 stood at 1.6% but stands to drop sharply in Q1, with an estimate of just 0.5%. One factor in the slowdown is a significant drop in exports, due to the stronger Japanese currency. The yen has gained about 3% against the dollar in 2018, hurting the competitiveness of Japanese exports. The Japanese consumer, however, remains pessimistic, and the April reading of 43.6 marked an 8-month low.