USD/JPY forecast as Japan unveils a new $135 billion stimulus

The Japanese yen continued its freefall after Japan approved a bigger-than-expected stimulus and after a report showed that inflation remained stubbornly high in October. The USD/JPY exchange rate was trading at 157.18, a few points below this week’s high of 157.73.

Japan passes a big stimulus package 

The USD/JPY exchange rate has been in a strong uptrend this year, a trend that accelerated after the recent leadership changes in the country. 

Japan’s ruling party elected Sanae Takaichi as the new prime minister, a notable thing considering that she supports Shinzo Abe’s policies.

One of her policy objectives were achieved on Friday when the cabinet approved a $135 billion stimulus package, bigger than the expected $112 billion. ¥17.7 trillion or $112 billion of the package will go to general account spending, while the rest will go towards price relief.

Some of the measures to be funded will be gas and electricity subsidies for each household in the next three months. Also, the government will provide about ¥20,000 or about $127 in handout per child and ¥2 trillion in funds to aid regions. The government will also raise the income tax-free threshold.

While a stimulus of this size may help to boost the economy, the risk is that it may help to fuel inflation in the country as we experienced in the United States, which provided handouts during the pandemic. 

Notably, the stimulus package came on the same day that Japan published strong inflation data. A report by the statistics agency showed that the headline Consumer Price Index (CPI) rose from 2.9% in September to 3.0% in October.

Similarly, core inflation, which excludes the volatile food and energy prices, rose from 2.9% to 3.0%. These numbers are significantly higher than Bank of Japan’s target of 2.0%. As such, analysts believe that the bank may decide to hike interest rates in the coming meetings.

Doubts about Fed cuts remain

The USD/JPY exchange rate remained in an uptrend as doubts about the Federal Reserve cuts remained. These doubts continued on Thursday after the Bureau of Labor Statistics (BLS) published the September jobs report. 

The report showed that the economy added over 110k jobs in September, a sign that the labor market stabilized before the government shutdown. 

Some Federal Reserve officials have warned about rate cuts. For example, Michael Barr, a governor, warned that the bank should be careful because inflation remains above 3%. He said:

“So we need to be careful and cautious now about monetary policy, because we want to make sure that we’re achieving both sides of our mandate.”

In another statement, Anna Paulson of the Philadelphia Central Bank said:

“Each rate cut brings us closer to the level where policy flips from restraining activity a bit to the place where it is providing a boost. So, I am approaching the December FOMC cautiously.”

USD/JPY technical analysis 

The daily timeframe chart shows that the USD to JPY exchange rate has been in a strong bullish trend. It has jumped from a low of 139.92 in April to 157.27 today. 

The pair has formed a golden cross pattern, which is a common bullish sign. It has remained above the Ichimoku and Supertrend indicator, a sign that bulls are in control.

Top oscillators like the Relative Strength Index (RSI) and the MACD have continued rising. Therefore, the most likely scenario is where it continues rising as bulls target the key resistance at 158. A move above that level will point to more gains, potentially to the resistance at 160. 

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