14.03.202403:30 Forex Analysis & Reviews: USD/JPY. "Shunto" and the yen

The USD/JPY pair has been rising for the second consecutive day, although the US dollar index is not in the best shape. The pair's growth is not "due to", but rather "in spite of". For instance, this is despite hawkish rumors that the Bank of Japan will abandon the negative interest rate at its March meeting, which is next week. Or despite the slowdown in the US core Consumer Price Index, which, albeit at a slower pace, continues to decline consistently (in February, it hit nearly a three-year low).

The market is ignoring all these factors as the pair tries to climb higher. On Wednesday, it even tested the 148 level. On Monday, the yen strengthened to the 146.50 mark, thus marking a four-week price low. So why does the Japanese currency react so weakly to the impending (possible) events?

Perhaps because the market has already priced in the first BOJ interest rate hike since 2007. The sharp 400-point decline in USD/JPY that we observed last week was a reaction to insider information regarding the potential outcomes of the "shunto," which was subsequently confirmed. Market participants acted according to the principle of "buy the rumors, sell the news." As soon as the rumors became facts, the Japanese currency ceased to enjoy increased demand.

There is a Japanese term - "shunto" - which is usually translated as "spring wage offensive". In the context of the economy, this term refers to the annual wage negotiations between enterprise unions and the employers in Japan.

This is not a single negotiation process but a series of negotiations, all of which take place at the same time - at the beginning of March. This year, the "shunto" has already practically ended, and as a result, major Japanese companies have decided to increase their employees' salaries by an average of more than 4% - against the backdrop of a labor shortage and a significant increase in the cost of living. In 2023, the wage increase resulting from the "shunto" amounted to 3.65% - nearly a 30-year record. This year set a 32-year record. In particular, the Toyota corporation fully approved its union's request for a $190 equivalent monthly wage increase (the largest increase since comparable data was first disclosed in 1999). Automaker Honda also agreed to significantly raise annual wages, specifically by 5.6% (the highest rate of increase in the last 35 years). And so on.

Insider information shared that the results of the "shunto" will allow the Japanese central bank to reach a decision on normalizing monetary policy in March, and this information started to emerge as early as last week. For instance, sources at Reuters reported that "a growing number of BOJ policymakers are warming to the idea of ending negative interest rates this month" (this meeting scheduled for March 18-19), amid expectations of a significant increase in wages by major Japanese companies. According to one source, the results of the spring wage negotiations are likely to be strong, so the central bank probably "won't have to wait until April."

Moreover, according to information from the Japanese news agency Jiji Press, following the March meeting, the BOJ will not only abandon negative rates but it is also considering ending its yield curve control programme and instead indicating in advance the amount of government bonds it plans to purchase.

Such insights emerged last week, which intensified bearish pressure on USD/JPY, causing the pair to drop by over 400 pips in just a few days (from 150.50 to a four-week low of 146.40). However, this week the pair has started to regain momentum again, despite the likelihood of hawkish decisions being maintained.

In my opinion, traders partly discounted the insights about the BOJ's upcoming decisions. In addition, the soft rhetoric of central bank representatives (primarily BOJ Governor Kazuo Ueda) with numerous "buts" and "ifs" played a role. In particular, the head of the BOJ said that the central bank will consider exiting ultra-loose policy but it "will be based on our understanding of a sustainable achievement of our price" and if a positive cycle of wages and inflation emerges.

But have the necessary conditions been created in the context of the March meeting? In fact, this is an open question. All insider information boils down to the fact that central bank members are ready to discuss this issue. None of the insiders could answer whether there are votes for this decision. Furthermore, BOJ representatives always emphasize the message that the policy normalization process will be gradual. In particular, BOJ Executive Director Tokiko Shimizu has repeatedly said that even if negative rates are abolished, it is important to maintain accommodative financial conditions. Ueda has mentioned something similar.

Therefore, USD/JPY buyers continue to hold their defense, demonstrating a bullish stance "against all odds." However, you may consider long positions only when the pair surpasses the resistance level of 148.20 (the upper Bollinger Bands line on the 4-hour chart). In that case, the next target for the upward movement will be the 149.00 level (the lower boundary of the Kumo cloud on the same timeframe).