USD/JPY has posted considerable gains in the Tuesday session. In North American trade, the pair is trading at 114.20, marking the first time that the dollar has broken above 114 yen since March 15. On the release front, Japanese wage growth declined by 0.4%, well off the forecast of a 0.4% gain. In the US, there was another strong employment report, as JOLTS Jobs Openings remained unchanged at 5.74 million, above the estimate of 5.67 million.
The dollar has pushed above the 114 line on Tuesday, as a soft Japanese wage growth report weighed on the yen. Wage growth declined 0.4% in March, marking the sharpest decline since June 2015. Prime Minister Abe’s government has urged businesses to raise worker’s wages, but the message has largely fallen on deaf ears, even with a tight labor market. A sluggish economy and weak consumer spending and dampened business confidence in the economy, so businesses are showing little appetite for raising wages and thus incurring more expenses.
The Japanese yen continues to lose ground, and has slipped 2.4% in the month of May. A weaker yen should result in a boost to the export sector, but on Saturday, BoJ Governor Haruhiko Kuroda said that this was not the case for Japan, since many Japanese companies were producing goods overseas. This argument may ring hollow with US president Trump and US exporters, who will likely cry foul if the yen move close to the 120 level. Early in his presidency, Trump accused Japan of manipulating the yen in order to gain a trade advantage over the US. The two sides have since agreed to let their foreign ministers handles issues related to currency matters, but flare-ups over the strength of the yen could emerge if the yen slide continues.
What’s next for the US Federal Reserve? On Friday, the US released key employment numbers for March. The data was generally positive, and this means that a June rate hike has become very likely. Nonfarm Payrolls improved to 211 thousand, easily beating the forecast of 194 thousand. The unemployment rate fell to an impressive 4.4%, compared to the estimate of 4.6%. This was the lowest rate since May 2007. Wage growth remained weak at 0.3%, but still matched the forecast. Still, with such little slack in the labor markets, we should see wage growth start to move higher. If that happens sooner rather than later, the Fed will have to reconsider a third rate hike in 2017. As things stand now, two more moves is the likely scenario. The strong job numbers have cemented a rate hike in June, as the odds of a June hike continue to rise and are currently at 87%, according to the CME Group.
