USDJPY: Time to take profit at key support level

Japan labour earnings data surprised the market significantly to the upside recording the largest rises in nearly 27 years at 4.8% YoY. Importantly, real wages growth has been positive for the second consecutive month and was up 0.6% YoY. Investors and the BoJ will be keenly watching the Shunto or spring wage negotiations in the coming two months. The Japanese Trade Union Confederation, Rengo, has announced that it is seeking overall wage rises of at least 5% and wagerises of 6% or more from SMEs. Both rises would be well above headline inflation currently running at 3.6% YoY in headline terms. The key will be whether companies and SMEs can afford to pay such claims. Companies’ representative group, Keidanren, has called the Rengo’s demands “extremely high,” while acknowledging that wage rises are needed given high inflation. The above helps reinforce BoJ Governor Kazuo Ueda’s view of strong momentum building in the cycle between higher wages and prices growth. The BoJ definitely wants to see positive real wages growth given that inflation and negative wages growth has been the norm for most of the past two years and has eroded household consumption. Today’s stronger-than-expected wages growth in Japan along with cooler US JOLTS data than expected has led to a fall in the US-Japan 2Y rate differential to its lowest level in four months. Japan’s rates market is now pricing in a small chance of the BoJ doing more than one more 25bp rate hike this year. USD/JPY has responded by starting to grind its way through support in the 153.00/30 region with major support at the intersection of the 100- and 200-day moving averages coming in at 152.70/80. These support levels could be tested in the coming days with the releases of several major US data releases including ISM and labour market data.

We also continue to note a reported meeting between US President Donald Trump and Japan’s PM Shigeru Ishiba on Friday where investors will be keenly watching for any signs Trump is about to turn his tariff threats on Japan.