The market is watching a paradigm shift in the Land of the Rising Sun. As the world grapples with geopolitical uncertainty in the Middle East, Japanese workers are finally starting to feel good.
Wage growth (adjusted for inflation) has risen for the third consecutive month, a record not seen since 2021. This is not just good news for workers, but it is the “green light” the Bank of Japan (BOJ) has been waiting for to emerge from the cocoon of low interest rates. Will the Yen rise again?
Wages Rise, “Hike” Signals Become Clearer
For traders, this signal is important because the BOJ needs evidence of “demand led inflation” before they dare to raise interest rates again. Traders are now starting to place as much as 74% confidence that the BOJ will raise interest rates this June.
Middle East: The “Wildcard” That Disrupts Plans
The Iran-Israel conflict remains a thorn in the flesh. Investors are beginning to worry that if this conflict drags on, soaring commodity costs will erode the profits of industrial players there and kill the momentum of wage increases. This means that, despite Japan's beautiful domestic data, the BOJ may have to "hold" if the global market is too risky. We need to watch whether Kazuo Ueda will dare to go against the tide or simply wait for calm before acting.
Weak Yen Becomes a Two-Edge Weapon
Japanese exporting companies do make big profits when the Yen weakens to 160 (USDJPY) in recent days, and these profits are used to raise workers' wages. However, if import inflation rises too sharply due to the Yen being too cheap, the people's purchasing power will be affected again. The market expects the Japanese government to not sit idly by and may intervene (Yen Intervention) again if the Yen falls too deep, thus having a domino effect on the strength of the US Dollar and indirectly the price of Gold.
MARKET TECHNICAL STRUCTURE
Looking at the impact of the expected BOJ rate hike:
Current Bias: Bullish for JPY (Yen), Bearish for USD/JPY in the short term if the June hike narrative dominates the market.
Key Levels (USD/JPY): The 155.00 level is a critical psychological support area. If this payroll data continues to give the BOJ confidence, we may see a breakdown below this level.
Reaction Area: Watch the 152.00 level. This has been a strong resistance area in the past. If broken below, it opens the door for a larger correction for the Yen.
Potential Reversal: Conversely, if Middle East tensions escalate, investors will flee to the USD as a safe haven, causing USD/JPY to retest the 160.00 level.
The BOJ is watching closely. Traders, don’t focus too much on the USD alone. A rising Yen could cause a big move in the cross currency market. Be careful with Middle East sentiment, it could ruin all your technical plans in an instant.
