Japanese Yen Tests 131, BOJ Core CPI Eases

03/28/2023

2 minutes read

2023.03.28 07:41

MarketPulse

The Japanese yen is in positive territory and broke below the 131 line in the Asian session. is trading at 131.17, in Europe, down 0.30% on the day.

BoJ inflation indicator eases

BoJ , the preferred inflation gauge of the central bank, dropped to 2.7% in February, down from 3.1% in January and below the estimate of 3.5%. The decline in core inflation wasn’t all that surprising, as last week’s National Core CPI also fell sharply, due to government subsidies for utility bills which took effect in February. The yen’s response has thus been muted to the inflation release.

The Bank of Japan has been very reluctant to tighten policy, and the only moves we’ve seen over the past few months have related to yield curve control, in order to prop up the yen. The BoJ has insisted that high inflation is transient and will fall to 2% later this year as the effect of high commodity prices eases. The Bank has said it would consider tightening if wages move higher, as this would be a sign that inflation is sustainable.

Stay tuned as employees won substantial wage hikes at annual labour talks earlier this month. If wage growth does translate into higher inflation, the BoJ will be under pressure to tighten policy, but the new BoJ Governor, Kazuo Ueda, has not given any indications that he plans to exit accommodative policy anytime soon. BoJ Governor Kuroda spoke earlier today, with a “business as usual” message. Kuroda said that the sustainable infation target had not been met and it was too early to discuss an exit from the Bank’s loose monetary policy.

The Federal Reserve announces its rate decision on Wednesday, and after a roller-coaster ride for market pricing, it’s currently close to a 50/50 toss-up. Will the Fed hike by 25 basis points or will it take a pause for the first time in the current rate-tightening cycle? The Fed was expected to raise rates by 25 bp, but the banking crisis, which has shaken up the financial markets, is a compelling reason for the Fed to stay on the sidelines and let the markets catch their breath.