USD/JPY – Surging yen breaks below 130 as rally continues

The Japanese yen broke below the symbolic 130 line earlier in the day, for the first time since February 3rd. In the North American session, USD/JPY is trading at 130.17, down 0.55% on the day. The yen is enjoying a splendid month of March, climbing 4.6% against the US dollar.

The yen has padded its gains this month courtesy of the banking crisis which triggered panic in the global financial markets. With the crisis centered on US and Swiss banks, jittery investors turned their backs on the US dollar and Swiss francs, traditionally safe-haven assets. This boosted the Japanese yen, another safe-haven currency. USD/JPY fell 2.4% last week, when the banking crisis was at its peak.

Banking crisis or not, the primary focus of central banks, including the Bank of Japan remains the battle to contain inflation. Japan’s inflation level is much lower than in Europe or the US, but it is well above the BoJ’s 2% target. Core CPI in February eased to 3.1%, matching the estimate and sharply lower than the January read of 4.2%, a 41-year high. The deceleration was due in large part to government subsidies for utility bills, and if the subsidies are lifted, inflation will likely jump higher.

The BoJ has insisted that high inflation is transient and will fall to 2% later this year as the effect of high commodity prices eases. However, in annual labour negotiations earlier this month, employees at major companies demanded and received substantial wage hikes, which could boost inflation and convince the BoJ that inflation is sustainable. Until the BoJ is convinced of that, it will not even consider tightening policy. The BoJ is going through a changing of the guard, with new Governor Ueda taking over the reins on April 9. Ueda will chair his first policy meeting on April 28, and the markets will be watching closely.

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USD/JPY Technical

• There is resistance at 130.60 and 131.57
• 129.30 and 127.05 are providing support

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