USD/JPY Yawns After BoJ CPI Slips

12/26/2023

2 minutes read

2023.12.26 06:42

BOJ Core CPI falls to 2.5%
BoJ’s Ueda hints at possible shift in policy

The Japanese yen is showing little movement on Tuesday. In the European session, is trading at 142.39, down 0.04%.

BoJ Core CPI Drops More Than Anticipated

Japanese inflation indicators have been heading lower. Last week, Core CPI, which excludes fresh food but includes fuel costs, dropped in November from 2.9% to 2.5%. On Tuesday, the Bank of Japan’s Core CPI index followed suit and declined to 2.7% in November, down from 3.0% in October.

Core inflation may have dropped in November, but it has exceeded the BoJ’s 2% target for well over a year and speculation is high that the central bank will shift policy and lift interest rates from negative territory, perhaps in early 2024. Such a move would mark a sea change in monetary policy, after decades of negative rates.

We have seen that tweaks to the yield curve control program have triggered sharp movement from the yen, and it’s a safe bet that a shift in rate policy would send the yen flying higher. BoJ policy meetings have become market-moving events and every comment from a senior BoJ official has the potential to shake up the currency markets.

BoJ Governor Ueda has hinted that the economy is slowly moving towards the BoJ target, but the central bank wants to see stronger wage growth before it considers inflation to be sustainable. The BoJ has insisted that current inflation is being driven by cost-push factors and is not sustainable. On Monday, Ueda said that he would consider shifting policy if the “cycle between wages and prices intensifies” but added that there was no specific timing to changing the Bank’s ultra-loose policy.

The US wrapped up last week with the PCE Price Index, the Federal Reserve’s preferred inflation indicator. The headline reading fell to 2.6% y/y in November, down from a downwardly revised 2.9% in October and lower than the market consensus of 2.8%. The core rate eased to 3.2%, down from a downwardly revised 3.4% and lower than the market consensus of 3.3%.

The numbers are welcome news for the Fed and support the case for rate cuts next year. Fed Chair Powell has pencilled in three cuts in 2024 but the markets have priced in up to six cuts. Investors have priced in a rate cut in January at 14%, up from 8% a week ago, according to the CME’s FedWatch tool.

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