USD/JPY Forecast: Sell the Rumour, Buy the Fact on Japan’s Inflation Surge?

• Japanese core inflation jumps to a 19-month high at 3.2%
• Bond yields spike but reverse after government pushback
• USD/JPY largely unmoved, hinting at preemptive yen buying
• Squeeze risk elevated if 149.40 holds firm

Summary

Japanese core inflation grew at the fastest pace since June 2023 in January, adding to the risk that the Bank of Japan (BOJ) may lift interest rates sooner and faster than markets expect. However, despite signs of persistent inflationary pressures, USD/JPY is largely unmoved on the report, suggesting some preemptive selling may have taken place given the yen’s sharp gains on Thursday.

Hot Inflation Priced In?

Core inflation—which excludes fresh food prices—jumped 3.2% in the year to January, up from 3% in December and a tenth above consensus. It was the largest increase in 19 months and more than a full percentage point above the BOJ’s 2% target. Including fresh food, inflation surged 4% to a two-year high, accelerating from 3.6% in December. Excluding both fresh food and energy, inflation lifted 2.5%, up a tenth from December and the fastest increase in 14 months.

Bond Blues to Boost Bulls Temporarily

Source: TradingView

Japanese two-year government bond yields—sensitive to shifts in BOJ policy expectations—hit the highest level since October 2008 immediately after the report but have since turned lower. A similar pattern played out in 10-year bonds, which reversed after hitting cyclical highs. The pullback followed remarks from Japan’s Finance Minister Katsunobu Katō, who warned that higher long-term rates could pressure the nation’s fiscal position—a subtle signal the government is growing uneasy with the relentless rise in Japanese yields.

As covered in a more detailed note earlier this week, yield differentials—especially when driven by Japan—have been highly influential on USD/JPY movements recently. Katō’s comments may complicate the pair’s ability to extend the bearish break seen on Thursday.

USD/JPY Squeeze Risk

Source: TradingView

While those who sold the break will be eyeing a test of the December 2024 swing low at 148.65, USD/JPY struggled to sustain moves below 149.40 in the days following that level being printed. As such, be on the lookout for a near-term reversal signal on shorter timeframes that could facilitate a squeeze back towards 150.

More broadly, momentum indicators remain firmly bearish, favouring selling rallies and bearish breaks beyond the ultra-near term.

-- Written by David Scutt

Follow David on Twitter @scutty