Japan Inflation Spikes Again: Is the Yen Panic Returning?

Japan Inflation Spikes Again: Is the Bank of Japan’s Strategy at Risk?

A spike in core inflation has been announced in Japan, just when it seemed that the yen panic could be abating. Early Friday data showed that Japan’s core inflation rate, which excludes the cost of fresh food, increased 3% year over year in February. This was lower than the 3.2% rate in January but higher than the 2.9% consensus estimate. From 4%, the headline consumer price index decreased to 3.7%.

In general, both indexes continued to be far higher than the Bank of Japan‘s 2% inflation objective, confirming central bank chief Haruhiko Kuroda’s claim of triumph over decades of deflation. Notably, headline inflation in Japan has been about 100 basis points (bps) higher than that in the United States since November.

USD/JPY Rebounds: What Does Japan’s Rising Rates and Inflation Mean for Global Markets?

In addition to the wage increases from the Shouto wage discussions, sticky inflation has strengthened support for BOJ rate hikes. Essentially, the possibility of a yen rise, which has the ability to destabilize risky assets like cryptocurrencies, is once again present. According to data provider TradingView, the dollar-yen (USD/JPY) pair was trading at 148.72 as of this writing, having rebounded by almost 300 pips since March 11 in an indication of further yen weakness.

However, the yen’s strength is supported by the decreasing or declining yield differential between the U.S. and Japan on 10-year bonds. Bullish signals for the yen have been provided by rising Japanese rates across the curve. Risk aversion, like that which we witnessed in August of last year, may result from a revived yen’s strength.

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