USD/JPY remains directionless near this week’s high as November labor cash earnings in Japan came in well below expectations, while full-time pay growth also eased. Despite soft wage data, strong consumer confidence and persistent labor shortages support the Bank of Japan’s (BOJ) hawkish stance, with USD/JPY expected to align with US-Japan rate differentials toward 140 in the coming months, BBH FX analysts report.

BOJ hawkish bias supported by labor shortages and confidence

"USD/JPY is directionless near this week’s high. Japan November labor cash earnings growth was soft. Cash earnings printed at 0.5% y/y (consensus: 2.3%) vs. 2.5% in October due to a 17% plunge in seasonal bonuses and survey-related distortions. The less volatile scheduled pay growth for full-time workers unexpectedly eased to 2.0% y/y (consensus: 2.4%) vs. 2.1% in October."

"Nevertheless, leading indicators suggest the feedback loop between higher wages and inflation is still in play, underscoring the Bank of Japan’s hawkish bias. Consumer confidence in income growth improved in December to the highest level since March 2024 while the Q4 Tankan business survey showed labor shortages are exceptionally widespread and persistent."

"We continue to expect USD/JPY to converge with US-Japan rate differentials and trade closer to 140.00 in the next few months."