Japan’s Core Inflation Beats Expectations, Fueling Rate Hike Speculation and Yen Volatility
Japan’s inflation remains elevated, with the gap between its headline inflation and U.S. counterparts approaching 100 basis points.
Just as concerns over yen weakness seemed to be easing, new data has reignited market fears.
Figures released on Friday show Japan’s core inflation—which excludes fresh food prices—rose 3% year-over-year in February. While this marks a slight decline from January’s 3.2%, it surpassed market expectations of 2.9%. Meanwhile, the headline consumer price index (CPI) eased to 3.7% from 4%, yet both figures remain well above the Bank of Japan’s (BOJ) 2% inflation target.
This persistent inflation, coupled with wage hikes from the annual shunto labor negotiations, has strengthened calls for a BOJ interest rate hike. A potential tightening of monetary policy could lead to a yen rally, a move that historically pressures risk assets, including cryptocurrencies.
At the time of writing, the dollar-yen (USD/JPY) pair traded at 149.22, reflecting a near 300-pip rebound since March 11, indicating renewed yen weakness, according to TradingView data.
However, Japan’s rising bond yields suggest potential yen strength ahead. The narrowing U.S.-Japan 10-year bond yield spread has provided support for the yen, with Japan’s 10-year bond yield holding above 1.5% and the 30-year yield surpassing 2.5%, both reaching multi-decade highs.
A resurgence in yen strength could trigger renewed risk aversion, similar to the market conditions observed in August last year.
