USD/JPY has inched lower in Thursday trading. In the North American session, the pair slightly above the 113 level. On the release front, US job data was a disappointment. ADP Nonfarm Payrolls plunged to 154 thousand, well below the estimate of 184 thousand. Unemployment claims rose to 248 thousand, above the estimate of 243 thousand. On Friday, there are three key employment events – Average Hourly Earnings, Non-Farm Employment Change and the unemployment rate. As well, the Federal Reserve will release its semi-annual Monetary Policy Report.
A rebound in global economic growth has been a godsend for the Japanese economy, which has enjoyed a strong 2017. The export and manufacturing sectors are strong, consumers and businesses are spending more, and GDP expanded at an annualized rate of 1.0% in the first quarter. However, despite years of radical accommodative policy, the Bank of Japan has failed to raise inflation levels, which remain well below the bank’s target of 2 percent. BoJ Governor Haruhiko Kuroda is on record in declaring that the bank would not lower its inflation forecast, but this stance apparently has changed. The BoJ appears ready to raise a white flag (of sorts) and lower its inflation target when policymakers gather for a rate meeting on July 20. However, traders should not expect the move to shake up the markets – any downgrade in the inflation target will likely be of a minor nature.
The Federal Reserve minutes were released on Wednesday, but the markets reacted with little more than a shrug. The minutes revealed divisions in the Fed over inflation and the bloated balance sheet, but failed to provide any clarity about future monetary policy. Some FOMC members expressed unease at the Fed’s current forecast of rate hikes, given the persistently low levels of inflation. According to the current "dot plot", the Fed expects to raise rates in December, and three times in 2018. There was also dissension over the timing of reducing the $4.2 trillion balance sheet – some policymakers were in favor of starting in September, while others preferred later in the year. At the June meeting, the Fed stated that it would begin reducing the balance sheet this year, but provided no details. Analysts expect the Fed to start winding down the balance sheet in September, prior to a rate hike in December. The markets are lukewarm about a rate hike in December, with the odds at just 50%, according to the CME Group.
