Inflation is slowly picking up
The phrase “high inflation” crops up daily in the financial press, as major economies grapple with what has become public enemy number one. Japan, however, does not come to mind as a country facing high inflation, and indeed inflationary pressures there are much more muted than what we see elsewhere. Yet, given that Japan had been dealing with deflation for decades, the fact that inflation exceeded the Bank of Japan’s 2% target is a significant development.
Last week, Japan’s core CPI for May came in at 2.1% yoy, matching the April reading. The last time the core CPI exceeded 2.0% was in 2015. Earlier today, the BOJ core CPI, the central bank’s favorite inflation gauge, s t stood at 1.5% in May, up one notch from April’s 1.4%. Next up is Tokyo Core CPI on Friday, which is expected to hit 2.1%, down from 1.9%. The inflation sands have changed drastically – just 13 months ago Tokyo’s core CPI was in negative territory.
The BoJ wants to see higher inflation, but has argued that the current cost-driven inflation is temporary, as it is driven by rising food and fuel prices. Governor Kuroda has insisted that the BoJ’s ultra-loose policy will not change until inflation is boosted by increased domestic demand and stronger wage growth. As part of this stance, the BoJ vigorously defended its control of the yield curve and capped the 10-year JGB yield at 0.25%.
The BoJ’s control of the yield curve has had a high price for the Japanese yen, which plunged around 17% in 2022 and recently fell to its lowest level in 24 years. The burning question facing investors is whether the BoJ will pull back and drop its 0.25% cap in order to stabilize the currency. On a broader level, the BoJ finds itself at odds with other major central banks, which have embarked on an aggressive rate hike cycle to rein in inflation. Will the BoJ make any adjustments to its ultra-lax policy? If so, the long-suffering yen could get a boost.
- USD/JPY tested resistance at 1.3540 earlier in the day. Above there is resistance at 1.3654
- USD/JPY has support at 1.3409 and 1.3295
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