The Japanese Yen (JPY) pushed higher in the Asian trading session on Friday, buoyed by encouraging domestic data that hinted at resilience in Japan’s economy. Official figures revealed that nominal wages surged 4.1% year-on-year in July, marking the strongest rise in seven months and surpassing expectations of 3%. Importantly, real wages adjusted for inflation turned positive for the first time since December, climbing 0.5% in July.
This improvement signals that household purchasing power is stabilizing, a factor that could fuel consumption and strengthen the Bank of Japan’s (BoJ) case for gradual policy normalization.
Household Spending Supports Recovery
Complementing the upbeat wage data, Japan’s household spending rose 1.4% in July compared to a year earlier. Although the figure fell short of the 2.3% forecast, the positive momentum is notable. On a month-on-month basis, spending advanced 1.7%, exceeding estimates and suggesting consumers are beginning to regain confidence despite cost-of-living pressures.
This combination of rising wages and spending helps support the outlook for a more durable recovery in domestic demand critical for the BoJ’s strategy of carefully pulling away from its ultra-loose monetary stance.
Inflation Keeps BoJ on Alert
The Labour Ministry also reported that consumer inflation, used to calculate real wages, rose 3.6% year-on-year in July, the slowest since November but still well above the BoJ’s 2% target. While the pace of price growth is cooling, it remains sufficiently elevated to reinforce market expectations that the central bank could deliver an interest rate hike before the year’s end.
Investors are increasingly divided over the timing, but the latest data makes it clear that the BoJ’s room for delaying normalization is narrowing.
Trade Optimism Lifts Yen
In addition to the economic data, trade developments provided the Yen with another leg of support. On Thursday, US President Donald Trump signed an executive order lowering tariffs on Japanese auto imports from 27.5% to 15%. The move, which will take effect within a week, represents a significant easing of trade friction between Washington and Tokyo.
For markets, the tariff cut removes a major uncertainty for Japan’s automobile sector a key driver of the economy offering a modest but meaningful boost to sentiment toward the Yen.
US Dollar Under Pressure from Fed Cut Bets
Across the Pacific, the US Dollar continues to face headwinds as expectations for Federal Reserve rate cuts grow stronger. Investors are now factoring in the likelihood of at least two 25-basis-point rate reductions before the year’s close. The growing conviction that the Fed will move aggressively to ease policy has undermined demand for the USD and kept the USDJPY pair on the defensive.
This pressure is compounded by concerns that a softening US economy may limit the currency’s upside even if risk sentiment improves.
Markets Await US Nonfarm Payrolls
Looking ahead, traders are shifting focus to the US Nonfarm Payrolls (NFP) report due later in the day. The labor market data will be pivotal in shaping expectations for the Fed’s next policy steps.
A weaker-than-expected NFP print could accelerate bets on deeper and faster rate cuts, likely driving the USDJPY lower. Conversely, a robust jobs report may temporarily ease pressure on the US Dollar, though the broader narrative of policy easing is unlikely to disappear soon.
Conclusion: Japanese Yen Positioned for Further Gains
The fundamental backdrop currently favors the Japanese Yen. With wages recovering, household spending strengthening, inflation staying above target, and tariff relief boosting trade prospects, the BoJ has stronger grounds to continue policy normalization. On the other hand, the US Dollar remains weighed down by expectations of aggressive Fed easing.
While short-term volatility is expected around the NFP release, the medium-term outlook suggests further gains for the Yen as markets price in a narrowing policy divergence between the BoJ and the Fed.
