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Fundamental and technical analysis of USDJPY

September 3, 2020

September 3, 2020

Analysis of USDJPY and forecast for the Japanese yen’s priceMikhail Hypov

In this article, we are examining the Japanese economy’s current state and making a forecast for JPY against USD in the long and medium term.

The article covers the following subjects:

Fundamental analysis of USDJPY

In my previous USD/JPY-related [article][1] I made a journey into the history of the Japanese economy’s development and formation.  I recommend examining this question in detail if you’re planning to trade actively in USDJPY. If you’ve already done that, you know that the Japanese economy has been in a recession for a long time.

![LiteForex: Forecast for the Japanese yen: Fundamental and technical analysis of USDJPY][2]

The chart above shows GDP monthly growth compared with the previous period. Starting from the 90s, this indicator has been near zero, dropping to the negative zone from time to time. Also, we see that the current loss has already exceeded the year 2008’s loss.![LiteForex: Forecast for the Japanese yen: Fundamental and technical analysis of USDJPY][3]

The slump began at the end of 2019, even before the pandemic and the crisis. It points to fundamental problems in the Japanese economy which only grew worse during the crisis. The pandemic will be over sooner or later, but the domestic negative factors will slow down the country’s recovery and put pressure on the yen.![LiteForex: Forecast for the Japanese yen: Fundamental and technical analysis of USDJPY][4]

The evolution of the Bank of Japan’s refinance rate is shown in the chart above. We see that the value near zero was set in the 00s. The rate moves to minus 0.1% in 2016, during Prime Minister Shinzo Abe’s term. One of the peculiarities of his economic approach, called “Abenomics”, is soft monetary policy.![LiteForex: Forecast for the Japanese yen: Fundamental and technical analysis of USDJPY][5]

The Abenomics’ effect became even more so evident from 2012 to 2020. The M2 money supply grew 40% during that period, as you can see in the chart above. ![LiteForex: Forecast for the Japanese yen: Fundamental and technical analysis of USDJPY][6]

Another chart above shows that the JPY index collapsed at that time. Since 2016, its dynamics has been in a flat trend, but the latest crisis and the money supply’s explosive growth will put a strong pressure on its further development.

At the press conference on 28 August 2020 Shinzo Abe announced its resignation related to health problems. Conspiracy theorists may note it’s not his first resignation over the same reasons. Abe resigned in 2007 too, just on the eve of the economic crisis. Might Abe know something and try avoiding responsibility for more severe economic consequences?  Technical analysis will help us answer this question. However, Yoshihide Suga, the likeliest candidate for the PM post, has already said that Abe’s course will continue and the monetary policy will remain soft. One of Abenomics’ priorities was, for example, raising an inflation target to 2% a year.

![LiteForex: Forecast for the Japanese yen: Fundamental and technical analysis of USDJPY][7]

As the chart above shows, that target was reached only once, in 2015. Then the index would hardly rise above 1%. In the crisis circumstances, hitting the target will be even more difficult and require serious work of the BoJ’s printing press.

Technical analysis

![LiteForex: Forecast for the Japanese yen: Fundamental and technical analysis of USDJPY][8]

To make a forecast for USDJPY, let’s get back to the yen index. The chart above shows that this indicator has been in a global bearish trend since 2012. We see consolidation within the limits of this correction. The bearish correction is very likely to continue as a zigzag wave structure.![LiteForex: Forecast for the Japanese yen: Fundamental and technical analysis of USDJPY][9]

Zooming in, we see that consolidation is inside a triangle. As the bearish trend continues, this pattern’s breaking target is at around 75 points. Since the index has approached the pattern’s acute angle, a breakout will take place no later than in 2022. The historic low being at 79.5 points, the index won’t drop below this level in a positive scenario. If the scenario is negative, there can be a movement to 68 points or 61.8% of wave A. Thus, whichever scenario the market may choose, the general sentiment for the yen will stay bearish, which we should consider when making a forecast for USDJPY.

Correlation with DXY and JXY

Let’s compare the USD index and USDJPY. I have already made this kind of comparison for [USDCHF][10] and [AUDUSD][11]. In both cases, there was a strong correlation between the currency pair and the DXY index.

![LiteForex: Forecast for the Japanese yen: Fundamental and technical analysis of USDJPY][12]

The chart above shows no correlation between USDJPY (blue line) and DXY (red line). ![LiteForex: Forecast for the Japanese yen: Fundamental and technical analysis of USDJPY][13]

However, USDJPY and the yen’s index JPY are interdependent.  The correlation ratio is minus 1, which means these two instruments mirror each other.

Scenario for USDJPY for the next few years

![LiteForex: Forecast for the Japanese yen: Fundamental and technical

analysis of USDJPY][14]

If the correlation between JDY and [USDJPY ][15] remains negative, we will see a strong impulse for the dollar/yen pair quite soon. At the same time, the chart above shows that USDJPY triangle’s bottom is more massive, so the breaking target will be at around  61.8% of wave A, which corresponds to 68 points in the JDY index. ![LiteForex: Forecast for the Japanese yen: Fundamental and technical analysis of USDJPY][16]

We see there are no reversal signals. Consolidation will most likely continue next year. Strong support will be at 2020’s low at around 101.18 JPY. If the price moves above the level of 108.50 JPY and the monthly candlestick closes at this level, consolidation will be cancelled. If this level is broken, the target will be at 130 JPY.

Forecast for USDJPY for 2020

![LiteForex: Forecast for the Japanese yen: Fundamental and technical

analysis of USDJPY][17]

Switching to the weekly chart, we see that  [USDJPY][15] is likely to have rebounded to the triangle’s upper limit at 107.30 - 108 JPY  by the end of 2021, with JXY dropping from the triangle’s upper line.

Besides the triangles, there are some other factors that confirm the probability of a retracement:

  1. Accumulation of resistance levels for JPY, marked as a green area;
  2. USDJPY’s retracement from the support level at 104, marked with a violet line;
  3. Long shadow below formed at the end of July points to a strong buyer (marked with a green arrow).

Forecast for September

![LiteForex: Forecast for the Japanese yen: Fundamental and technical

analysis of USDJPY][18]

A local consolidation in the form of a triangle is seen in the chart above. The market is in a balance state, so the 2020 scenario doesn’t seem to be so simple. The pair will most likely be located between 106.00 and 160.75 JPY in the first half of September: the triangle’s upper edge and  monthly Pivot R1 / P levels pass between these values. A breakout outside the triangle may happen already in December. The upward breakout target will be at 109.50 JPY, the triangle’s bottom.  Given potential strong resistance of the triangle’s edge, an estimated target should be adjusted to 108.40 JPY.![LiteForex: Forecast for the Japanese yen: Fundamental and technical analysis of USDJPY][19]

In that case, a trading plan will look like the following:

  1. Long position at 106 JPY, Pivot indicator’s P level
  2. Stop loss below S1 at 150.25 JPY
  3. Target 1:  107.26 JPY,  the vertical volume indicator’s control point
  4. Target 2 - 108.40 JPY, the triangle’s upper line 

The Profit/Risk ratio is about 3.

Trade period: September-October 2020

Short-term scenario

![LiteForex: Forecast for the Japanese yen: Fundamental and technical

analysis of USDJPY][20]

Consolidation is likely to continue on the weekly time frame. I don’t recommend trading a flat trend as high volatility and bad quality of signals may play you a dirty trick. If you decide to risk, open a long position as close as possible to the vertical volume indicator’s control point at 106 JPY. Don’t close your position once the triangle’s upper edge has been reached. Move stop loss to a breakeven level and wait for a reversal signal. The pattern is likely to be broken. Average into the position at 106.80 JPY in case of an upward breakout. I wouldn’t suggest opening a short position at the retracement from the triangle’s edge as stop loss is very likely to be triggered there.

Please take care of your money and observe your risk management rules. Experiment on a [demo account][15], trade with real money,  and not the other way round! Subscribe and keep in touch!

Good luck and profits, everyone!

Yours,

Michael @Hypov

P.S. Did you like my article? Share it in social networks: it will be the best “thank you” :)

Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.

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Price chart of USDJPY in real time mode

![Analysis of USDJPY and forecast for the Japanese yen’s price][23]

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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