The phrase “surging inflation” is in the financial press on a daily basis, as the major economies grapple with what has become public enemy number one. Japan, however, does not come to mind as a country dealing with high inflation, and indeed inflationary pressures there are much more modest than what we’re seeing elsewhere. Still, given that Japan was dealing with deflation for decades, the fact that inflation has moved above the Bank of Japan’s target of 2% 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 Core CPI was above 2.0% was back in 2015. Earlier today, BOJ Core CPI, the central bank’s preferred inflation gauge, came in at 1.5% in May, up a notch from the 1.4% in April. Next up is Tokyo Core CPI on Friday, which is expected to rise to 2.1%, up from 1.9%. The inflation sands have dramatically shifted – just 13 months ago, Tokyo Core CPI was in negative territory.
The BoJ wants to see higher inflation, but has argued that the current cost-push inflation is temporary, since it is driven by higher 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 has vigorously defended its yield curve control and capped the yield on the 10-year JGB at 0.25%.
The BoJ’s yield curve control has come at a steep price for the Japanese yen, which has plunged around 17% in 2022 and recently fell to a 24-year low. The burning question facing investors is will the BoJ retreat and abandon its 0.25% cap in order to stabilize the currency. On a broader level, the BoJ finds itself out of line with other major central banks, which have embarked on an aggressive rate-hike cycle in order to curb inflation. Will the BoJ make adjustments to its ultra-loose policy? If so, the long-suffering yen could get a boost.
USD/JPY Daily Chart
- 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