USD/JPY defends 115.00 amid softer Japan data, firmer yields

• USD/JPY picks up bids to challenge Friday’s pullback from three-week high.
• Japan’s preliminary Industrial Production, Retail Trade eased in December.
• Pressure mounts on Japan PM to announce emergency on Tokyo as virus infections refresh record top.
• Hawkish Fedspeak, Russia tensions keep yields firmer amid a softer start to the week.

USD/JPY consolidates Friday’s losses near 115.30, the highest level in three weeks as markets in Tokyo open for Monday.

In doing so, the yen pair justifies downbeat Japanese data and firmer US Treasury yields amid a sluggish start to the week.

That said, the preliminary readings of Japan’s Industrial Production for December dropped to 2.7% YoY versus 9.7% expected and 5.1% prior. On the same line was the Retail Trade for the said month, 1.4% YoY versus 2.7% forecast and 1.9% previous readouts.

Elsewhere, coronavirus conditions in Japan continue to worsen with the escalating numbers of hospital beds in Tokyo pushing the government to announce the virus-led emergency for the second time. “Japan confirmed more than 82,000 daily coronavirus infections on Saturday, reaching a new record for the fifth straight day, as the highly transmissible Omicron variant continues to spread across the country,” said the Kyodo News.

Amid these plays, the US 10-year Treasury yields add 1.5 basis points (bps) to 1.795% whereas S&P 500 Futures drop 0.30% intraday at the latest.

It’s worth noting that Friday’s US Q4 Employment Cost Index (ECI) probed USD/JPY bulls after easing to eased to 1.0% from 1.2% market consensus and 1.3%. The wage-related data challenged the market’s previous concerns of 50 basis points (bps) of a rate hike by the Fed when it meets in March. It should be noted, however, that the Fed’s preferred gauge of inflation, namely Core PCE Price Index for December rose to 4.9%, versus 4.8% forecast and 4.7% prior, to keep the Fed hawks on the table.

Following the US data release, Federal Reserve Bank of Minneapolis President Neel Kashkari said that he expects Fed to raise rates at the March meeting. Though, the policymaker emphasized the importance of incoming data while also saying, “Have to see how data plays out.”

On the same line was Raphael Bostic, president of the Fed’s Atlanta branch who reiterated his call for three Fed rate lifts in 2022, in an interview with the Financial Times (FT), with the first coming in March. “If the data say that things have evolved in a way that a 50 basis point move is required or [would] be appropriate, then I’m going to lean into that . . . If moving in successive meetings makes sense, I’ll be comfortable with that,” said Fed’s Bostic per FT.

It’s worth noting that the US Senate's aggression towards passing a law to sanction Russia weighs on the risk appetite and test the USD/JPY bulls but the hawkish Fed favors the quote’s upside momentum.

Moving on, US jobs report and virus updates will join the Russia-Ukraine story to direct short-term USD/JPY moves amid a light calendar on Monday.

Technical analysis

A daily closing beyond the November 2021 peak of 115.52 becomes necessary for the USD/JPY bulls to aim for the 116.00 threshold and the monthly high near 116.35. Alternatively, the 20-DMA level of 114.82 restricts short-term declines of the yen pair.