Japanese Yen Outlook: Firmer CPI Fails to Lift JPY

Japan’s latest CPI report strengthened the case for another BOJ rate hike in September, yet the yen weakened across the FX majors following the release. With a hike already largely priced in, traders appear more focused on whether the BOJ accelerates tightening, while intervention risk, US yields and higher oil prices add to an increasingly complicated backdrop for JPY.

 

 

 

Japanese Yen Weakens Despite Firmer CPI and BOJ Hike Bets

Japan Inflation Keeps BOJ September Hike in Play

Japan’s latest inflation data strengthened the case for another Bank of Japan rate hike in September, with core CPI excluding fresh food rising 1.8% year on year in July from 1.6%, while the measure excluding both fresh food and energy accelerated to 1.9%.

The breakdown shows goods prices are still doing much of the heavy lifting, rising 2.7% as the weak yen, higher commodity prices and imported costs feed through to consumers. Services inflation also edged higher to 1.2%, which is more important for the BOJ as it points to firms gradually passing higher labour costs on to consumers.

Source: Statistics Bureau of Japan, Reuters

 

• Core CPI rose 1.8% YoY in July, up from 1.6% in June and in line with expectations.
• Underlying CPI excluding fresh food and energy accelerated to 1.9%, moving closer to the BOJ’s 2% target.
• Goods inflation led at 2.7%, showing imported costs, the weak yen and higher commodity prices are still doing much of the work.
• Services inflation edged up to 1.2%, a modest but important sign that domestic wage pressures are gradually feeding into prices.

 

 

BOJ September Hike Becomes the Base Case

A September hike to 1.25% is increasingly becoming the base case, while the bigger question for yen traders is whether persistent inflation and yen weakness force the BOJ to accelerate its tightening cycle beyond September.

While a September hike may seem like a bullish cue for the yen, the BOJ’s gradual tightening alone may not be enough to back a stronger currency. Besides, the bigger shift has already come from joint US-Japan intervention, which has made it considerably more dangerous for traders to aggressively rebuild yen shorts. With Washington signalling it could support Japan again, further BOJ tightening would add another layer of support rather than carry the burden alone.

 

 

 

Yen Shrugs Off Firmer CPI as BOJ Hike Bets Build

The Japanese yen was a touch lower across the board after the latest CPI figures were released, suggesting the data did little to materially change a policy outlook where a September hike is already largely priced in.

But the fact that the yen continues to weaken despite the US and Japan joining forces on intervention suggests yen bears may be rolling the dice — or goading the powers that be back into action. GBP/JPY, EUR/JPY, CHF/JPY, CAD/JPY and NZD/JPY sit at three-week highs, while AUD/JPY remains beneath Monday’s shooting star high.

USD/JPY fell sharply on Wednesday after the US Treasury stepped in to support the bond market as the 30-year yield broke above 5.3%. Yet bond traders are putting up a bit of a fight, with renewed selling sending the 30-year yield back above 5.2% on Thursday and helping USD/JPY recoup around two-thirds of Wednesday’s losses.

Source: ICE, TradingView

 

 

Higher Oil and JGB Yields Complicate the Yen Outlook

Higher oil prices are adding another complication for yen traders. Crude jumped around $2 overnight as Middle East tensions intensified, helping push Japanese bond yields higher as inflation concerns resurfaced. The 10-year JGB yield rose 3bp to 2.875%, while the 30-year climbed 5.5bp to 4.06%. Higher Japanese yields should theoretically lend the yen some support, but rising energy costs are also a headwind for an economy heavily reliant on imported fuel, leaving the currency caught between tighter BOJ expectations and a deteriorating terms-of-trade backdrop.

Source: ICE, TradingView

 

USD/JPY Outlook: Summary

• Japan CPI strengthened the case for a September BOJ hike, but much of that move is already priced in.
• The yen remains weak despite firmer inflation and joint US-Japan intervention, suggesting traders are still willing to test policymakers.
• Higher US yields continue to support USD/JPY, while rising JGB yields provide only limited offset.
• Higher oil prices complicate the picture by lifting Japanese inflation expectations while worsening the terms-of-trade backdrop for the yen.

 

 

 

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge