Japan's economy is currently experiencing a complex situation characterized by "slowing growth" alongside "rising inflationary pressures." The preliminary data for Japan's May PMI indicates that while the manufacturing sector remains in expansion, its growth rate has notably decelerated. Meanwhile, the services sector has shown signs of stagnation for the first time in over a year. The data reveals that Japanese companies are facing persistent pressure from costs related to energy, transportation, and raw materials. Particularly against the backdrop of heightened tensions in the Middle East, risks to global supply chains and energy transportation have intensified. In response, Japanese firms have begun increasing their inventories in advance to hedge against potential supply disruptions.
However, this inventory buildup is simultaneously driving up corporate operating costs. Research from Danske Bank points out that Japanese companies are currently experiencing significant margin compression. Although businesses have raised their selling prices, the pace of these increases still lags behind the rate of cost inflation.
Cost pressures for Japanese firms have now reached their highest level since 2022, signaling that Japan's inflation risks are gradually spreading from imported input costs to broader sectors of the economy.
In the services sector, Japan's Services PMI has ended a streak of expansion lasting more than a year, indicating a cooling in consumer and business activity. Japan's economic recovery had previously relied heavily on a rebound in service consumption and growth in tourism demand. However, against the backdrop of a slowing global economy and high energy costs, Japan's domestic demand is now under pressure.
Unlike in Europe and the United States, Japan's most critical issue is not overheated demand, but rather how to manage persistent cost-push inflation while economic growth is not yet fully solidified. Bank of Japan (BoJ) board member Asako Ogi recently stated that if cost pressures remain elevated while economic growth stays stable, the BoJ could potentially raise interest rates again as early as its meeting on June 15-16.
The Bank of Japan has already begun its gradual shift away from the "era of ultra-loose policy" towards policy normalization. For a long time, the BoJ maintained ultra-low interest rates and yield curve control policies to stimulate inflation and economic growth. However, as Japan's inflation has stabilized above the target level, the central bank's policy direction has clearly changed. Markets are now paying particular attention to the upcoming nationwide CPI data.
Previous data from the Tokyo area showed that core inflation, which excludes fresh food, eased in April, falling from 1.8% in March. This was partly due to government energy subsidies mitigating the impact of rising oil prices on households. However, Danske Bank suggests that for the BoJ, a decrease in energy market uncertainty might actually increase the likelihood of a rate hike.
The reasoning is that once international energy markets stabilize, the Japanese government may gradually reduce its energy subsidies, causing businesses and households to feel the real inflationary pressures more directly. Concurrently, the BoJ might also consider the economic environment more suitable for advancing policy normalization after the risks from energy prices subside.
Unlike central banks in Europe and the US, the Bank of Japan is currently more concerned about how prolonged low interest rates continue to distort the economic structure. Long-term ultra-low rates have contributed to sustained yen weakness and persistently high import costs. As the global inflation environment changes, the BoJ is gradually attempting to move away from its long-standing reliance on ultra-loose monetary policy.
From the perspective of the currency market, the yen has recently found some support. Although high-yielding currencies like the US dollar and British pound maintain a relative advantage, market expectations for future BoJ rate hikes are beginning to limit the yen's potential for further depreciation.
Particularly in an environment of rising global market volatility, some capital is increasing its allocation to the yen for its safe-haven properties.
From a technical analysis perspective, the USD/JPY pair has shown notably increased volatility in its high-range consolidation recently. Daily charts show that while the exchange rate remains in a high range, its upward momentum has begun to slow. The MACD indicator is converging at high levels, suggesting a weakening of bullish momentum. The RSI indicator is gradually retreating towards the neutral zone, indicating more cautious market sentiment. Key resistance levels are observed in the 158.00 to 159.00 area; a failure to break above this could lead to a phase of correction for USD/JPY. Important support levels lie near 155.00 and 153.80. Looking at the 4-hour chart, the yen is showing some signs of short-term stabilization. Short-term moving averages are beginning to flatten, and the MACD indicator is approaching the zero line, suggesting the market is awaiting new directional cues from policy and inflation data. However, as the US Federal Reserve maintains its hawkish stance and the interest rate differential between the US and Japan remains wide, a sustained reversal in the yen's trend would require more substantial policy support.
The Japanese economy is currently at a critical turning point. On one hand, economic growth momentum is slowing, and service sector expansion has stalled. On the other hand, corporate cost pressures and inflation risks continue to rise. In this context, the Bank of Japan's policy normalization process is likely to continue. Market expectations for another rate hike in June are gradually heating up, which is a key reason for the recent support for the yen. However, given that Japan's economic foundation remains relatively fragile, the BoJ is expected to maintain a cautious approach to the pace of future rate hikes. Market focus will center on Japan's inflation data, energy price movements, and the BoJ's assessment of the balance between growth and inflation. Overall, while the yen's long-term weak trend has not been completely reversed, the market has begun to reassess the possibility of the Bank of Japan further exiting its ultra-loose monetary policy stance.
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