USD/JPY Rallies, Japanese Inflation Remains Above Target

06/23/2023

2 minutes read

2023.06.23 06:28

USD/JPY climbs above 143
Japan’s core CPI remains above 3%

The Japanese yen has stabilized on Friday after falling close to 1% a day earlier. In the European session, is trading at 143.05, down 0.04%. Earlier, USD/JPY touched a high of 143.45, the highest level since early November 2022.

On the data calendar, the US releases ISM Services PMI later today. The consensus stands at 54.0 for June, following 54.9 in May. The services sector has posted four straight readings over the 50 level, which separates expansion from contraction.

Japan’s core inflation higher than expected

Japan continues to grapple with high inflation and core CPI for May was higher than expected. With inflation around 3%, other central banks would love to trade places with the Bank of Japan, but Japan’s inflation remains above the 2% target and has become an issue for the central bank after decades of deflation.

Nationwide core CPI, which excludes fresh food but includes energy items, climbed 3.2% in May y/y, down from 3.4% in April but above the consensus of 3.1%. What was more worrying was the “core-core index”, which excludes fresh food and energy, jumped 4.3% in May, up from 4.1% in April. This was above expectations and marked the highest level since June 1981.

Core CPI has now remained above the BoJ’s inflation target of 2% for 14 consecutive months. This puts into question the BoJ’s stance that cost-driven inflation is temporary and therefore there is no need to tighten monetary policy. Inflation risks are tilted to the upside and the BoJ will find it more difficult to defend its ultra-loose policy if inflation pressures don’t ease.

The BoJ maintained its policy settings at last week’s meeting and has no plans to tighten interest rates anytime soon. This puts the BoJ at odds with other major central banks, which have been aggressively tightening rates in order to curb inflation. The US/Japan rate differential has been widening as the Fed raises rates while the BoJ stands pat. This has sent the yen sharply lower, raising concerns that the government could intervene in the currency markets in order to prop up the yen.

The Ministry of Finance stunned the global financial markets in September and October when it intervened, at a time when the yen had fallen below the 150 line. The yen hasn’t fallen quite that low, but I would expect to hear louder verbal intervention out of Tokyo if the yen falls below 145.

USD/JPY Daily Chart