Japanese Yen: Support test as Japan data firm – BBH

Brown Brothers Harriman's Elias Haddad points out that USD/JPY is testing support at its 200-day moving average of 158.34. Japanese data indicates private sector growth reached a six-month high in August, with the composite Purchasing Managers Index (PMI) improving to 53.4 in August from 52.7 in July, boosted by gains in both manufacturing and services.

However, Japan's July CPI rose in line with expectations, with headline CPI at 1.9% year-over-year, core CPI ex. fresh food at 1.8%, and core CPI ex. fresh food & energy at 1.9%, all below the Bank of Japan's 2026 forecast of 2.5%. The market currently prices an 82% chance of a 25 basis point Bank of Japan rate hike at the September 18 meeting, but the author doubts a more aggressive tightening.

The swaps curve reflects 82% odds of a BoJ rate increase to 1.25% at the September meeting, with 75 basis points of tightening expected over the next year. Despite these expectations, the author believes USD/JPY could still decline due to a potential dovish Federal Reserve rate adjustment, as the US labor market remains stable and wage growth aligns with the Fed's inflation target.