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Japanese Falls Below 130, BOJ Core CPI Next

The Japanese yen has edged lower on Monday. In the European session, USD/JPY is trading at 130.15, up 0.45%. The yen slipped 1.3% against the dollar last week, falling as low as 131.57 before recovering.

Inflation heads higher

Core CPI jumped 4.0% y/y in December, its highest level since 1981. This matched the forecast and followed a 3.7% gain in November. The usual suspects were at play, as food and energy prices rose sharply. Energy prices climbed 15.2%, while food prices were up 7.4%, the fastest pace since 1977. Core CPI has exceeded the BoJ’s 2 percent inflation target for nine straight months, as the central bank’s argument that inflation is transitory has become increasingly hard to defend.  The BoJ is projecting that inflation will peak at 3% in March, but it’s unclear why inflation will start to fall, barring a complete turnaround in energy and food prices. With wage growth lagging behind inflation, the cost of living is squeezing consumers, who are likely to cut back on consumption which will hamper economic growth.

We’ll get another look at inflation on Tuesday, with the release of the central bank’s preferred inflation gauge, BoJ Core CPI. The index rose steadily in 2022, from just 0.8% in January to 2.9% in November. The consensus for December is unchanged but a reading of 3.0% or higher will put pressure on the BoJ to tighten policy, which would be bullish for the yen.

The BoJ surprised the markets last week when it maintained policy settings at its monthly meeting. The non-move may have been primarily aimed as an ambush on speculators who bought yen in anticipation of the BOJ tightening policy. Still, the markets are expecting a shift in the BoJ’s ultra-loose policy, although it could occur after the new governor takes over in April. What is clear is that the BoJ will continue to command the attention of traders. The BoJ’s next meeting is on March 8th.

USD/JPY Technical

  • There is resistance at 130.67 and 131.69
  • 129.46 and 128.41 are providing support

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