Japan is preparing to release significant data in the next few days that could offer insights into the direction of the JPY. Lately, the yen's behavior has been far from typical, as traders closely follow comments from Japanese officials, anticipating potential intervention to support the currency.

Adding to the confusion, the head of the BOJ, Kazuo Ueda, has made seemingly contradictory statements, creating a tangled situation in the forex market. Untangling this complexity is essential to gain a clearer understanding of the yen's potential trajectory in the medium-to-long term.

Let's start with the data. Tomorrow, Japan will publish its trade balance, which is projected to show a substantial reduction in the trade deficit, narrowing it to just ¥46.7B from the previously reported ¥1.37T in May. Japan's trade statistics tend to fluctuate significantly, but if the forecasts are accurate, this would be the smallest deficit since late 2021. The yen's weakness and its temporary recovery earlier this year have significantly impacted the trade balance, making it a crucial factor in the BOJ's decision-making process.

The shrinking deficit can be attributed to two main factors: declining imports and expected export growth. The weaker yen has led to higher export prices, boosting exports. However, the reduced imports also indicate a lack of economic dynamism, potentially signaling lower purchasing power among Japanese citizens, which could be a worrisome indicator for the BOJ.

Regarding the BOJ's intentions, the Governor recently expressed concern about the yen's weakness, suggesting that the bank might take measures to address it and restore market pricing. However, just two days later, he appeared to backtrack, emphasizing the BOJ's commitment to easing policies.

This shifting stance highlights the BOJ's dilemma. On one hand, they aim to support the economy through easing measures, which involves overlooking a weaker yen as it benefits exports. On the other hand, the weaker yen has contributed to rising inflation and a slowdown in the economy, making the BOJ apprehensive about its negative impact.

To clarify the situation, Ueda has repeatedly emphasized the desire to see inflation steadily rise to the target rate of 2%. However, the current surge in inflation is viewed as temporary, driven by non-market factors such as yen weakness resulting from carry trades and speculation that the BOJ won't intervene. The BOJ is trying to encourage market forces to strengthen the yen without actively taking measures to do so.

Should inflation reverse its course and continue to rise, the BOJ might be compelled to recognize that it cannot have both a weak yen supporting exports and stable inflation. In such a scenario, the BOJ might consider taking action to shore up the yen, potentially by widening the YCC (Yield Curve Control) again. Japanese annual June inflation is expected to tick up to 3.3% from the previous 3.2%.