Inflation Nation: Japan's Decreasing Inflation And Its Political Impact On USD/JPY

This Friday morning, Japan’s annual inflation rate is set to reveal a fresh decline, catching many off guard, as it unexpectedly dropped to 3.2% in May 2023 from the prior month’s 3.5% peak, missing market forecasts of 4.1%. The slowdown is evident across various sectors, with furniture & household utensils easing from 10.0% to 9.6%, and fuel, light, and water charges persistently decreasing for the fourth consecutive month, with electricity registering a significant drop of -17.1% versus -9.3%. Despite certain sectors holding steady, like housing (1.2%) and education (1.3%), others, such as transport (2.2%), clothes (3.9%), medical care (2.1%), and miscellaneous items (1.3%), exhibited quickened price growth. Notably, food prices surged to the highest since September 1976, rising from 8.4% in April to 8.6%. Additionally, core inflation dipped to 3.2% in May from its three-month peak of 3.4% in April, falling below forecasts of 3.1% and remaining above the Bank of Japan’s 2% target for the 14th consecutive month. On a monthly basis, consumer prices leveled off in May, following the sharpest rise since April 2014 with a 0.6% surge in April.

In the realm of technical analysis, the USD/JPY pair finds itself in Stage 3 of its cycle on the weekly chart, indicating a potential descent lower ahead with lower highs already starting to take shape. An observable 5-point harmonic pattern to the downside hints at the further potential for this movement to unfold. With the upcoming FOMC announcement in the U.S. next week, the pair’s trajectory is likely to encounter turbulence, challenging any notion of smooth and steady movements.