Japanese yen sinks as inflation rises

• Japan’s core inflation rises in June
• USD/JPY jumps over 1%

The US dollar continues to rally as the Japanese yen is down for a fourth straight day. In Friday’s European session, USD/JPY is trading at 141.93, up 1.33%.

The yen has taken investors on a roller-coaster ride. The Japanese currency surged 2.37% last week against the greenback but has reversed directions and dropped 2.15% this week.

Japan’s core inflation rises in June

Japan’s core inflation (excluding fresh food) ticked higher to 3.3% y/y in June, up from 3.2% in May and matching the consensus estimate. Core core inflation (excluding fresh food & energy) dipped lower to 4.2% y/y, down from 4.3% in May and matching the consensus.

The readings indicated that the inflation picture barely changed in June, but that’s not really good news for the Bank of Japan. The core CPI has now stayed above the BoJ’s 2% target for the 15th straight month. BoJ Governor Ueda has continued the Bank’s ultra-loose policy despite high inflation, insisting that inflationary pressures are temporary. This stance, however, is becoming increasingly untenable as inflation has been persistently high and is not showing any signs of falling.

Friday’s inflation numbers come just a week before the BoJ’s meeting, and there is speculation that the central bank could phase out its yield curve control (YCC) policy that has been distorting bond pricing. A change to YCC would almost certainly send the yen sharply higher, which was the case late last year when the BoJ stunned the markets and widened the target band for 10-year government bonds.

Earlier this week, Governor Ueda poured cold water on any change in policy, but this could be an effort to scare off speculators looking for a tweak to YCC. It seems more likely than not that the BoJ will maintain policy settings at next week’s meeting, but a shift is certainly on the table, especially with the yen floundering near the 142 line.

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USD/JPY Technical

• USD/JPY has pushed past resistance at 1.4067 and 141.28. There is weak resistance at 142.12, followed by 142.62
• There is support at 139.68 and 138.52

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