USD/JPY dips ahead of Japanese CPI

The Japanese yen has edged higher for a second straight day. In the North American session, USD/JPY is trading at the 114.00 line.

In economic news, Japan releases December inflation data and the BoJ will publish the minutes of its December meeting. In the US, economic releases were mixed. Unemployment claims jumped to 287 thousand, above the forecast of 220 thousand and up from the previous release of 231 thousand. The Philly Fed Manufacturing Index rose to 23.2, up from 15.4 prior and above the consensus of 20.0 points.

Inflation in Japan is moving higher, although at a much more modest clip than is the case in the US or UK. Core CPI, which had been hovering close to zero for months, surprised to the upside in November with a 0.5%, up from 0.1% prior. This was its highest level since February 2020. BoJ policymakers aren’t losing sleep over surging inflation, but after decades of deflation, rising prices are a novelty for the central bank, as well for businesses and consumers. The BoJ has no plans to shift from its ultra-easy stance, and the bank kept policy intact at this week’s policy meeting.

Still, it was significant that at the meeting, the bank revised upwards its inflation forecast, which hasn’t occurred since 2014.  For the fiscal year starting in April, the BoJ is projecting inflation of 1.1% up from the 0.9% gain it forecast in October. This is noteworthy because the BoJ is acknowledging that inflation could overshoot its projections, something we never saw in the years of deflation.

Will Fed jolt markets with 0.50% hike?

Unlike their counterparts at the Bank of Japan, Fed policymakers are focused on surging inflation and how to contain it. A rate hike is looking increasingly likely in March, but it’s unclear just how much of a push the Fed has in mind. We’ve seen a measured approach of 0.25% hikes for years, but with inflation running at a 40-year high, there is talk of a dramatic 0.50% hike. The Fed is clearly sensitive to market conditions, so odds are that it will avoid a huge 0.50% jump in rates. Still, unusual times may require unusual methods, so it will certainly be interesting to follow the Fed in the weeks ahead.

USD/JPY Technical

• There is resistance at 115.54, followed by 116.88
• There is support at 113.18 and 112.16

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