Japan Industrial Output Misses Forecasts in May, Risks BoJ Pace

The BoJ's July 30-31 policy meeting is the next major catalyst for the yen. The board will update its quarterly growth and inflation forecasts. A downward revision to the growth outlook would reduce the case for a July hike. Most economists surveyed by Bloomberg expect no move this month, with the next increase coming in October.

The May production miss was broad based. Output of transport equipment, including cars, fell 1.2% from April. Electronic parts and devices dropped 0.8%. General machinery rose 1.5%, not enough to offset weakness elsewhere.

Inventory levels rose 0.3% in May, suggesting some production went into stockpiles rather than sales. That could weigh on future output if demand does not pick up.

The BoJ will have one more data point before its July meeting: the June industrial production print, due July 31. That release comes the day after the policy decision, so it will not factor into the board's deliberations. The central bank will instead rely on the Tankan survey, due July 1, and the June consumer price index, due July 19.

For yen traders, the production data tilts toward delay in BoJ rate action. The carry trade remains intact, pressure on the yen continues. The next move in USD/JPY will depend on the Tankan survey and any Fed signals.