Jan 22, 2024

Japanese inflation cooled further in December, with headline inflation falling to 2.6% from 2.8% in November, while core inflation fell to 2.3% from 2.5%, in line with market forecasts. Japanese price pressures are at their lowest level since mid-2022. However, it is still above the 2% central bank target, and the Bank of Japan will need to see more signs of entrenched wage inflation before it considers tempering its multi-year ultra-loose monetary policy.

Next week, the Bank of Japan will announce its latest monetary policy decision. The central bank is expected to leave all policy levers untouched. The BoJ will also release the first Quarterly Outlook for Economic Activity and Prices Report 2024. This report presents the BoJ’s outlook for economic activity and price developments, assesses upside and downside risks, and outlines its views on the future course of monetary policy. This report may be vital in deciding the future path of the Japanese Yen.

USDJPY Daily Chart

The latest round of Fed pushback against what they perceive to be excessive US rate cut expectations boosted the US dollar since the end of last year. The US dollar index has rallied by nearly 3% since December 28th, pushing it higher. Over the same timeframe, USD/JPY rallied from 140.28 to a current 148.05, a 6% higher rise. USD/JPY is nearing levels where the Bank of Japan may start to ‘verbally intervene’ to try and stifle any move higher. The pair touched 150.91 on November 13th last year, just three pips off the July 2022 multi-decade high of 151.94. While the BoJ will hope that a weak Japanese Yen helps to import inflation, Japan’s trading partners will not be best pleased that the low level of the Yen is hurting their exports to Japan. The closer the USD/JPY gets to 150, the more likely the Bank of Japan will start discussing possible intervention.

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