Impact of Exchange-Rate Fluctuations on Economic Activity

BoJ Deputy Governor Ryozo Himino emphasized the significant impact of exchange-rate fluctuations on economic activity, stating that it affects inflation beyond just import prices. The Bank of Japan may need to adopt a more hawkish stance to stimulate buyer demand for the Yen. With this in mind, can the economic indicators coming out of Japan potentially shift investor expectations regarding a BoJ rate hike in July?

On Thursday, June 27, retail sales figures from Japan are anticipated to have an impact on investor sentiment towards a possible July BoJ rate hike. Economists are predicting a 2.0% year-on-year increase in retail sales for May, following a rise of 2.4% in April. Should the actual numbers surpass expectations, it could signal to the BoJ that a rate hike in July may be warranted. Rising consumer spending trends could also fuel demand-driven inflation.

Labor Market Data and Inflation Numbers

While retail sales figures play a crucial role, labor market data and inflation numbers for Tokyo (to be released on Friday) could potentially bear even more weight in shaping sentiment towards the BoJ’s rate trajectory. Analysts are forecasting the Tokyo core annual inflation rate to move from 1.9% to 2.0% in June, while the overall annual inflation rate is expected to rise from 2.2% to 2.4%. Should these numbers exceed expectations and the unemployment rate remains stable, a July rate hike by the BoJ could become more likely. The central bank might use the weaker Yen’s impact on the Japanese economy as a rationale for a market-moving decision.

US Housing Sector Data

While economic indicators from Japan will influence the USD/JPY currency pair, data from the US could also play a significant role in shaping views on interest rate differentials. Later in the Wednesday session, market participants will closely watch US housing sector data. Analysts are predicting a 2.9% increase in new home sales for May, following a 4.7% decline in April. Fluctuations in new home inventories can potentially impact price pressures and housing services costs, including rents. Housing services inflation contributes to headline inflation, making it an essential factor to consider. Rising demand for new homes might indicate robust consumer confidence, which could, in turn, drive consumer spending and elevate expectations of a soft landing for the US economy.