Quantitative Tightening and Interest Rate Differentials

Some economists believe quantitative tightening (QT) could strengthen the Yen more sustainably. The BoJ plans to announce cuts to JGB purchases (QT) in July.

Aggressively cutting JGB purchases would narrow interest rate differentials with the US dollar, bolstering the Yen.

Conversely, a modest rate hike would have a limited impact on rate differentials.

Natixis Asia Pacific Chief Economist Alicia Garcia Herrero commented on JGB purchases, stating,

“Bank of Japan to start quantitative tightening, which could support the Yen more than intervention.”

Aggressive cuts to JGB purchases could drop the USD/JPY below 150. BoJ support for multiple rate hikes and aggressive cuts to JGB purchases could send the USD/JPY toward 140 through Q4 2024.

Key Economic Indicators to Watch

On Tuesday, labor market data from Japan will require consideration. Tighter labor market conditions may support wage growth and increase disposable income. Higher disposable income could fuel consumer spending and demand-driven inflation.

Economists forecast Japan’s unemployment rate (Tues) to remain at 2.6% in June. An unexpected rise could allow the BoJ to leave interest rates at 0.1%.

However, retail sales numbers may also draw the BoJ’s interest on Wednesday, July 31. A marked increase in retail sales could allow the BoJ to signal rate hikes over the remainder of 2024.

Economists forecast retail sales to increase by 0.4% in June after rising by 1.7% in May.

US Economic Indicators: Dallas Fed Manufacturing Index

On Monday, July 29, the Dallas Fed Manufacturing Index will be in focus.

Economists expect the Dallas Fed Manufacturing Index to increase from -15.1 in June to -12.0 in July.

Higher-than-expected figures could support expectations of a soft US landing and the USD/JPY at current levels. However, recent US inflation data suggest the numbers will unlikely influence the Fed interest rate trajectory. Prices for goods declined in June.

Charles Schwab Senior Investment Strategist Kevin Gordon commented on the June Report, stating,

“Dallas Fed Manufacturing Index 6-month outlook for new orders rose in June to highest since March 2022 … employment outlook went the other way and fell to lowest since December 2023.”