The yen is finishing the week on a softer footing with USD/JPY rising back above 149.50 after hitting a low yesterday at 148.18. The pair is currently on course for the second consecutive week of modest gains. The yen has been undermined this week by the BoJ’s cautious policy update (click here) when they expressed more unease over elevated overseas uncertainties which were described as “rising quickly”.
The BoJ will be in a better position to assess the outlook for Japan’s economy and monetary policy at their next meeting on 1st May after President Trump announces his plans in early April for “reciprocal tariffs” and sector specific tariffs on autos, semi-conductors and pharmaceuticals. He has indicated that details for broad-based and potentially more disruptive tariffs will be released on 2nd April.
In the interim the BoJ is understandably reluctant to send a stronger signal over the timing of the next rate hike which has been weighing modestly on the yen this week. We still expect the BoJ to deliver another rate hike in July but acknowledge that it could be delivered sooner in May or June.
There was further encouragement overnight for the BoJ to continue to normalize monetary policy. The release of the latest CPI report from Japan for February revealed that headline inflation slowed less than expected to 3.7% down from 4.0% in January compared to the consensus forecast for a deeper pullback to 3.5%.
The resumption of government subsidies on electricity and gas cut 0.3 ppts from headline inflation and fresh food prices subtracted a further 0.16ppts. However, the core-core measure of inflation which excludes fresh food and energy picked up modestly by 0.1ppt to an annual rate of 2.6%. There was also only a modest slowdown in services inflation by 0.1ppt to 1.3% in February although that was mainly due to an unfavourable base effect. Overall, the report is broadly in line with the BoJ’s current outlook for Japan’s economy meeting their conditions for further monetary tightening.
Alongside recent stronger wage negotiation results for the upcoming fiscal year, the BoJ should have more confidence that inflation can be sustained closer to their 2.0% target. The developments support our view that the recent yen sell-off is likely to prove short-lived. The yen is still the best performing major currency so far this year.
