Japanese yen steady ahead of Tokyo CPI

Tokyo CPI expected to rise

Inflation has been on the rise in Japan and the trend is expected to continue with the release of Tokyo CPI later today. The headline figure is expected to rise to 4.4% in December, up from 4.0% in November, while the core rate is forecast to climb to 4.2%, up from 4.0%. Earlier this week, BoJ Core CPI, the central bank’s preferred inflation gauge, rose to 3.1%, up from 2.9% prior and above the forecast of 2.9%. BoJ Core CPI has now accelerated for 11 straight months, challenging the BoJ’s stance that inflation is transitory.

The BoJ is projecting that inflation will peak at 3% in March, but this forecast seems questionable, given that rising energy and food prices have been driving inflation higher and higher. With wage growth lagging behind inflation, the cost of living is squeezing consumers, who are likely to cut back on consumption which will hurt Japan’s fragile economy.

Kanda sends warning to speculators

The yen has been relatively quiet over the past two weeks, but Japan’s top “currency diplomat” sent out a warning today. Vice Finance Minister for International Affairs Kanda said that sharp, one-sided moves in the currency markets would not be tolerated. Kanada oversaw the currency intervention in October after the yen had fallen close to 152 to the dollar. The yen has since rebounded and is currently trading close to 130 to the dollar. Kanda’s message is aimed at speculators, but with inflation rising and the BoJ’s ultra-loose policy looking increasingly anachronistic, speculators are likely to continue betting that the BoJ will have to tighten policy and the yen will rise as a result. The IMF had a message of its own for the BoJ, suggesting that the central bank allow more flexibility in 10-year bond yields, which would mean a shift in BoJ policy.

It’s a busy day on the economic calendar, with the US releasing GDP and durable goods. GDP is expected to slow to 2.6% in Q4, which would still point to solid growth. Durable Goods is forecast to rebound and gain 2.5% in December, following a soft reading of -2.1% in November. Traders can expect some volatility from the US dollar in the North American session, as the markets have jumped on any soft readings as a signal that the Fed will have to ease up on its aggressive rate policy, and this has sent the US dollar lower.

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USD/JPY Technical

• There is resistance at 130.36 and 131.69
• 129.46 and 128.40 are providing support

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