Original article by Kenny Fisher
Source: MarketPulse (https://www.marketpulse.com/news/tokyo-inflation-lower-than-expected-yen-extends-losses/)
Title: Japanese Yen Weakens Further as Tokyo Inflation Misses Expectations
The Japanese yen continued to slide on Thursday as financial markets reacted to lower-than-expected inflation numbers out of Tokyo. The weaker inflation figures reduced expectations that the Bank of Japan (BoJ) would pursue aggressive monetary tightening, leading investors to pull back from yen-denominated assets.
At the time of writing, USD/JPY had climbed to the 157.60 range, continuing a steady upward movement seen over recent trading sessions. The data from Tokyo’s inflation report on Thursday suggested that price pressures in Japan may be easing, a notable development in the context of the BoJ’s ultra-loose monetary stance throughout the post-pandemic environment.
Key Highlights:
– Tokyo’s core inflation rose by 1.9% in May year-over-year, falling short of the market estimate of 2.2%.
– Headline CPI in Tokyo also slowed to 2.2% compared to April’s 2.4% reading, again falling shy of forecasts.
– The Japanese yen dropped across major currency pairs following the announcement.
Tokyo Inflation Data Falls Short
The Tokyo Consumer Price Index (CPI) serves as a reliable leading indicator for the national inflation statistics, as it is released ahead of the broader nationwide data. It draws attention from analysts, policymakers, and investors alike, especially in periods of monetary policy uncertainty.
For May, Tokyo core CPI, which excludes the effect of fresh food but not energy, registered a 1.9% increase from the previous year. This marked the slowest pace of core inflation growth since March 2022 and fell below the Bank of Japan’s 2% inflation target. The market had anticipated CPI growth closer to 2.2%, which would have signaled a degree of persistent inflationary pressure.
Meanwhile, Tokyo’s headline CPI, which includes both food and energy prices, rose by 2.2%, slightly below both the prior month’s 2.4% and the anticipated 2.3%.
Implications for the Bank of Japan
The soft inflation numbers from the capital region suggest that Japan’s inflationary pressures may be easing more than previously forecasted. This development has significant implications for the BoJ, which has been signaling a gradual transition away from its ultra-loose monetary stance.
– Economists had expected the BoJ to raise interest rates at least once more this year following its landmark decision in March to deliver its first rate hike following eight years of negative interest rates.
– If inflation continues to undershoot expectations, the BoJ may face increasing pressure to delay additional hikes or deploy more measured approaches.
Bank of Japan Governor Kazuo Ueda has emphasized a data-dependent approach to future interest rate moves. Lower inflation figures like those seen in Tokyo could give the central bank leeway to remain accommodative for longer.
Yen Weakness Intensifies
The yen’s downward trend has remained a persistent theme in 2024. Following the Tokyo inflation report, the Japanese currency extended its losses against the US dollar and other major counterparts. USD/JPY traded at a session high of roughly 157.60 after hovering in the 156.80 zone earlier in the day.
Factors driving continued yen weakness include the still-wide interest rate differentials between Japan and economies such as the United States:
– The Federal Reserve has held rates at elevated levels as US inflation remains sticky and labor market conditions resilient.
– Japan, by contrast, has maintained ultra-low rates, even after its March hike, keeping its primary policy rate in a target range of 0%-0.1%.
– This interest rate divergence has strengthened the carry trade appeal, where investors borrow in low-yielding currencies like the yen and invest in higher-yielding counterparts.
Intervention Watch
Japan’s Ministry of Finance (Mo
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