Japanese yen steady ahead of CPI report

Thursday is a bank holiday in Japan and not surprisingly, the yen is almost unchanged as it trades close to the 135 line.

Japan’s CPI expected to rise

Japan’s inflation levels are much lower than in the US, but the Bank of Japan is concerned as inflation continues to rise. We’ll get a look at National Core CPI, a key inflation indicator on Friday. National Core CPI has accelerated for seven straight months and hit 4.0% in December. The upswing is expected to continue in January, with an estimate of 4.3%. The Bank of Japan has insisted that inflation is transitory, but the trend upward in the National Core CPI and other indicators does not seem to support that stance.

It’s a sensitive time for the BoJ, with Kazuo Ueda set to replace Haruhiko Kuroda as the next Governor of the BoJ in early April. Kuroda’s decade at the helm was marked by an ultra-loose monetary policy that has finally ended decades of deflation. However, as inflation is rising, the BoJ’s yield curve control (YCC) policy has damaged the bond market and is becoming unsustainable.

The question remains, however, whether the new Governor will have the support to make changes to the YCC. Ueda has kept a low profile and said that the current loose policy is necessary, but saying all the right things while he waits in the wings is to be expected. There is always the possibility that Kuroda will make a last-minute policy move before his term ends in order to lower the pressure on Ueda. The next few months should be interesting at the BoJ.

The FOMC minutes repeated the Fed’s hawkish message, one that we’ve been hearing for months. FOMC members said there were signs that inflation was heading lower but more rate hikes were necessary to bring inflation back to the 2% target. It should be noted that the minutes are somewhat stale, given the sizzling employment report and the jump in retail sales which were released after the February meeting. These releases point to a surprisingly resilient US economy and that will provide support for the Fed to remain hawkish. The markets have currently priced in a 73% chance of a 0.25% hike and a 27% of a 0.50% increase, according to CME’s FedWatch.

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USD/JPY Technical

• There is resistance at 135.75 and 137.35
• 1.3418 and 1.3350 are providing support

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