Yen drifting as CPI rises

Inflation is on the rise in Japan. In November, Core CPI rose 0.5% y/y, above the consensus of 0.4%. That might seem like small potatoes compared with inflation numbers in the UK and the United States, but given that inflation has been negligible for years in Japan, this is certainly a change in direction. The November rise marked the biggest increase since February 2020. Unsurprisingly, the uptick in inflation was caused by a surge in energy costs, which rose 15.6%. Wholesale prices jumped some 9.0% in November, indicating that Japan has not been immune to higher global commodity prices. However, businesses have been reluctant to pass on higher costs to consumers, which has kept consumer inflation low – food prices, for example, rose just 1.4% in November. The massive discrepancy between wholesale and consumer prices, which is not as glaring in the UK or the US, is a result of businesses’ fear that price rises will cut into consumer spending.

The bump in inflation is unlikely to make any waves at the Bank of Japan, which is committed to an ultra-easy monetary policy until inflation climbs to the bank’s 2% target. Inflation is expected to reach the 1% level sometime next year, but the 2% target continues to look unrealistic. Still, the BoJ has stubbornly stuck to this target and shows no indications of normalizing policy until inflation reaches this level.

Earlier on Friday, the government passed a record annual budget of 107.6 trillion yen. Japan’s debt is already the highest among developed countries, and this budget will strain the public debt even further. Policymakers are determined to boost sagging economic growth through spending and continuing an ultra-easy monetary policy. This policy has failed to boost Japan’s economy in the past, and it is questionable if the result will be any different this time around.

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USD/JPY Technical

• The pair broke above resistance at 114.27 on Thursday. The next resistance line is 114.82
• There is support at 113.16 and 112.60

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