• Key earnings data will be released on Friday 02.30 GMT as the BoJ is fixated on wages

• The market remains focused on the rumoured intervention from Japanese authorities

• A strong set of data could offer some short-term respite to the ailing yen

Yen Intervention in focus

The market is still digesting Tuesday’s rumoured intervention, and it is trying to evaluate the likely next steps from Japanese authorities. The yen has been left unprotected with the market continuously favouring the US dollar due to the massive yield differential. Despite this yen suffering, the Bank of Japan needs sufficient economic evidence in order to start scaling back its policy accommodation, starting with an abandonment of negative rates that have been in place since February 2016.

BoJ needs stronger economic data

The latest quarterly Tankan was mostly positive, retail sales continue to surprise on the upside, but the August inflation figures confirmed the deceleration seen in other regions, potentially making the BoJ’s job even harder. However, the BoJ has probably been waiting for this pullback in inflation as one of the policy board members, Tamara, recently mentioned that “Japan’s inflation is likely to slow for time being, and then accelerate moderately again”.

The BoJ cares a lot about wages

For this inflation acceleration to be confirmed, the BoJ is putting a lot of faith on continued wage increases. Since taking over in April, Governor Ueda has been quite explicit about the importance of wages, and therefore earnings, on finally achieving an exit from the current loose monetary policy stance.

The April 2023 wage round was very positive from a monetary policy perspective, and Governor Ueda has been nonstop on the wires highlighting this situation. At his September 25 speech in Osaka, he stated that the “key to whether Japan is close to achieving our target is whether wage growth leads to moderate rise in inflation”.

Earning data could whet the BoJ’s appetite

Importantly, on Friday we will get the August labour cash earnings and the overall household spending numbers. The former has been recording decent annual increases, but the BoJ would prefer higher prints going forward. Their wish might come true on Friday as the August figure is seen accelerating to 1.5% YoY from 1.3% in July. Similarly, the overall household spending has been hovering in negative territory, but economists forecast an improved print at -4.0% YoY.

Understandably, the current figures are not extremely pleasing to the eye for BoJ members, but they verify the improvement across the economic spectrum seen over the past year in Japan. In this context, the often-overlooked leading economic index is also published on Friday. It is expected to jump higher again, building upon the continued improvement recorded by this forward-looking indicator since the January 2023 trough.

Yen is trying to recover against the euro

The yen has been on the back foot against most developed economies’ currencies. The focus is understandably on the US dollar/yen pair, which is trading a tad below the 150 perceived threshold, but euro/yen is exhibiting a similar tendency. It peaked at 159.75 on August 30, which is the strongest level since February 22, 2007. It is now hovering around the 155 region as the market is digesting Tuesday’s rumoured intervention. A positive set of data could allow the bears to aim for a lower euro/yen print, but at the end of the day, the continued threat of market intervention by the Japanese authorities will mostly determine the market reaction function.