Japanese Yen Weekly Forecast: Services PMI and Inflation Key to BoJ Rate Path Outlook

USD/JPY Extends Winning Streak as US-China Agree to Trade War Truce

A US-China trade war truce lifted risk sentiment last week, sending USD/JPY higher for the fourth consecutive week. USD/JPY climbed to 148.647 before retreating to close the week with a 0.18% gain at 145.621.

Outlook: Trade Talks, BoJ Signals, and Domestic Data in Focus

While trade developments remain a key driver for USD/JPY, traders should also monitor BoJ signals and incoming macroeconomic indicators.

Tertiary Industry Index – Why It Matters

On Monday, May 19, the focus will be on Japan’s tertiary sector, with the Tertiary Industry Index potentially influencing Japan’s Q1 GDP revisions. Economists expect the Tertiary Industry Index to fall 0.2% month-on-month in March after stalling in February.

A weaker-than-expected reading could signal more gloom for Japan’s economy, potentially sinking bets for a Q3 2025 Bank of Japan rate hike. A less hawkish BoJ stance could weigh on the Yen. Conversely, an unexpected rise may raise expectations for an upward revision to Q1 GDP, keeping rate hike hopes alive.

The tertiary sector, which includes retail, financial services, hospitality, and more, contributes around 70% of Japan’s GDP, underscoring its economic importance.

Japan Trade Data – Implications for BoJ

On Wednesday, May 21, trade data will require consideration as US-Japan negotiations advance. Economists expect exports to rise 2% year-on-year in April after a 3.9% increase in March, while forecasting imports to fall 4.5%.

Weaker imports and exports could signal early Q2 headwinds, reinforcing expectations of a BoJ rate hold. A spike in exports, however, may signal tariff front-loading, increasing the significance of May’s trade data for the BoJ.

In Q1 2025, external demand declined 0.8% quarter-on-quarter, contributing to a 0.2% GDP contraction—a reminder of Japan’s export vulnerability, given its 45% trade-to-GDP ratio.

Services PMI – Crucial for BoJ Outlook

Japan’s private sector PMIs will influence the BoJ rate path on Thursday, May 22. Economists forecast the Jibun Bank Services PMI to fall from 52.4 in April to 51.2 in May. Given that the services sector accounts for over 70% of Japan’s GDP, the Jibun Bank Services PMI will impact Yen demand more.

A drop below 50 may raise speculation about an economic recession, closing the door on a 2025 rate hike. Conversely, an upside surprise could signal economic resilience, supporting a more hawkish BoJ stance.

Japan Inflation – Another Piece of the Puzzle

On Friday, May 23, Japan’s national inflation data will give further clues on the BoJ’s potential rate path. Economists forecast the annual inflation rate to rise from 3.6% in March to 3.7% in April, while expecting the inflation rate ex-food and energy to remain at 2.9%.

Hotter-than-expected figures may strengthen the case for a Q3 2025 BoJ rate hike, contingent on a US-Japan trade deal. However, softer data would ease pressure on the BoJ to make a move. For context, the BoJ’s inflation target is 2%.

USD/JPY Outlook: Tariffs, Trade, and Consumption Trends

USD/JPY faces another pivotal week as investors monitor trade developments, economic data, and central bank guidance.

• Bullish Yen Scenario: Positive data, hawkish BoJ rhetoric, or an escalation in trade tensions could send USD/JPY toward 140.
• Yen Carry Trade Unwind Risks: A USD/JPY drop below the September 2024 low of 139.576 could accelerate the Yen Carry Trade Unwind.
• Bearish Yen Scenario: Weak economic indicators, dovish BoJ cues, or easing trade tensions may push the pair toward 150.

US Data to Drive Fed Policy and Dollar Demand

In addition to trade headlines, US services data and jobless claims will influence Fed policy expectations and affect Dollar demand.

Key data releases this week include:

• Initial Jobless Claims (May 22).
• S&P Global Services PMI (May 22).

Economists forecast the Services PMI to slip from 50.8 in April to 50.6 in May. A drop below the neutral 50 mark could revive recession fears as services account for around 80% of the US GDP. If services inflation cools, markets may price in a Q3 rate cut. On the other hand, a pickup in services sector activity and inflation may dent hopes for a Q3 2025 Fed rate cut.

Economists forecast initial jobless claims to increase from 229k (week ending May 10) to 231k (week ending May 17). A spike in jobless claims above 250k could signal a deteriorating labor market, potentially curbing consumer spending and dampening inflation. However, a lower claims reading may reinforce confidence in economic resilience, supporting a less hawkish Fed policy stance.

Potential Price Scenarios:

• Bullish US Dollar Scenario: Upbeat services and labor market economic data and hawkish Fed bets could drive USD/JPY toward 150.
• Bearish US Dollar Scenario: Weaker-than-expected US data and a dovish Fed policy outlook may drag USD/JPY toward 140.

Short-term Forecast:

USD/JPY direction this week will hinge on trade negotiations, central bank signals, and macro data—though trade talks are likely to carry the greatest weight.

USD/JPY Price Action

Daily Chart

On the daily chart, the USD/JPY remains below the 50-day and 200-day EMAs, preserving a bearish technical setup.

A breakout above the 50-day EMA could open the way for a test of resistance at the April 9 high of 148.280. Sustained upside momentum may target the 149.358 resistance level and the 200-day EMA.

On the downside, a drop below 142.5 could bring 140 and the September 2024 low of 139.576 into view.

The 14-day Relative Strength Index (RSI) stands at 50.58, suggesting room for further gains, with overbought territory beginning above RSI 70.

Final Thoughts

With trade negotiations, economic data, and central bank commentary in play, the USD/JPY could see heightened volatility. Traders should stay alert to breaking news and policy signals.

For a deeper dive, explore our technical analysis here.