The Japanese core Consumer Price Index (CPI) and fourth-quarter Gross Domestic Product (GDP) released last week indicate that Japan's economy is continuing to recover, leading to heightened market expectations of an early rate hike by the Bank of Japan. Japan's CPI reached a new 19-month high in January, while the fourth-quarter GDP growth exceeded market expectations. These figures have strengthened market expectations that the Bank of Japan might end its negative interest rate policy earlier. Market analysts believe that sustained wage growth will further boost consumer spending, accelerating the shift in central bank policies.
Additionally, Bank of Japan Governor Kazuo Ueda stated last week that the central bank might increase government bond purchases to control market volatility if long-term interest rates rise significantly. This statement led to a fall in Japanese Government Bond (JGB) yields from a high point not seen since 2009, exerting pressure on the yen and limiting its room for further appreciation.
In contrast, weak economic data from the United States further weighs on the dollar's performance. The latest S&P Global Composite PMI indicates a slowdown in economic activity expansion in February, and the University of Michigan consumer sentiment index fell to its lowest level in 15 months. Consumers' expectations for future inflation rose to 4.3%, reaching the highest level since November 2023. Meanwhile, sales forecasts from major U.S. retailer Walmart fell short of expectations, raising concerns about a slowdown in U.S. consumer spending.
Federal Reserve officials remain cautious about cutting rates, especially as inflation remains stubborn, putting downward pressure on the dollar. Although the market previously expected the Fed to begin rate cuts in 2025, the latest economic data leaves policymakers still in a wait-and-see mode. Technically, the USD/JPY faces short-term downside risks, currently trading near 149.30, the lowest level since December last year. If the bearish trend strengthens further, the USD/JPY may retreat further towards the 148.70 region.
