Stronger wage growth would suggest a pickup in consumer spending, fueling demand-driven inflation. Moreover, a rebound in spending would lift economic momentum, given that private consumption accounts for roughly 55% of Japan’s GDP.
Bank of Japan Governor Ueda Takes Center Stage
On Tuesday, Bank of Japan Governor Kazuo Ueda will be in the spotlight after last week’s hawkish spin. Further hints of a rate hike would strengthen the yen, pushing USD/JPY lower.
Since last week’s hawkish comments, Japanese economic data sent mixed signals. Services sector inflation edged higher in November, with consumer confidence improving, supporting a more hawkish BoJ policy stance. However, household spending unexpectedly plunged 3.5% month-on-month in October, weighing on the yen.
Despite the household spending slump, Governor Ueda will likely maintain his hawkish position. Wage negotiations for the 2026 cycle have reportedly been positive, and the weaker yen continues to raise concerns about import prices and household purchasing power.
Will Producer Prices Support a December Hike?
On Wednesday, December 10, producer prices will provide insights into the demand backdrop and inflation outlook. Economists forecast producer prices to rise 0.3% month-on-month in November, down from 0.4% in October, and an increase of 2.7% year-on-year (October: 2.7%).
A larger-than-expected rise in producer prices would indicate a pickup in consumer prices. Typically, producers adjust prices based on demand, passing cost savings or price hikes on to consumers.
These forecasts align with the bearish short- to medium-term outlook for USD/JPY.
Follow our real-time updates to stay ahead of USD/JPY market developments.
US Economic Calendar: The Fed Takes Center Stage
As speculation intensifies about a BoJ rate hike, the Fed will deliver its final interest rate decision of the year, setting the stage for a volatile week. Ahead of Wednesday’s decision, labor market data will draw interest, while inflation figures will influence bets on a Q1 2026 rate cut.
Key data releases for the week ahead include:
ADP Employment Change Weekly (December 9).
JOLTs Job Openings (December 9): Expected to fall from 7.227 million in September to 7.2 million in October.
FOMC Interest Rate Decision, Economic Projections, and Press Conference (December 10): Economists expect a 25-basis-point cut.
Initial Jobless Claims (December 11): Expected to increase from 191k week ending November 29 to 205k week ending December 6.
Producer Prices (December 11): Economists expect producer prices to rise 0.4% month-on-month in November, up from 0.3% in October.
Weaker labor market data and softer producer prices would weaken demand for the US dollar, sending USD/JPY lower. However, the Fed’s interest rate decision, economic projections, and Fed Chair Powell’s press conference will be the key drivers for the US dollar and the USD/JPY pair.
Markets expect a 25-basis-point Fed rate cut on Wednesday, December 10, with the CME FedWatch Tool giving an 86.2% chance of a cut.
Barring a surprise hold, the market focus will be on the revised economic projections and the press conference. Upward revisions to GDP growth, a sticky inflation outlook, a modest drop in unemployment during 2026, and two further rate cuts would align with consensus.
Downward revisions to inflation and a sharper drop in unemployment, coupled with three to four cuts, would weigh on the US dollar and send USD/JPY lower.
Fed Chair Powell Departure and FOMC Committee Changes
Fed Chair Powell’s press conference is typically a market mover. However, markets are likely to discount his policy outlook, given his imminent departure. Notably, the composition of the FOMC Committee will also change for 2026, which may dampen the effect of the projections on the US dollar and USD/JPY trends.
In summary, the imminent replacement of Powell as Fed Chair and the change to the FOMC Committee will likely water down the effects of the projections and press conference on markets. Nevertheless, a two-to-three rate projection, predictions of softer inflation, and a weaker labor market outlook would weigh on the US dollar and USD/JPY.
Market View: Medium-Term Yen Strength
In my opinion, USD/JPY would likely drop to 150 on bets on a BoJ rate hike and a Fed rate cut. A dovish Fed policy outlook and hawkish BoJ would support the bearish medium-term outlook. A break below 150 would pave the way for a longer-term (8-16 weeks) fall to 140.
AloJapan.com