USD/JPY climbs for a fifth consecutive session on Friday, reaching the 160.00 level despite stronger-than-expected Japanese inflation and labor-market data. The latest figures provide the Bank of Japan with further justification to tighten policy, yet the Yen remains under pressure as interest-rate differentials continue to favor the US Dollar.
Tokyo CPI excluding food and energy rose 2.0% in August, while headline inflation increased to 1.9%. The BoJ’s closely watched measure, which excludes fresh food, accelerated to 1.8% from 1.7%, exceeding expectations and marking a third consecutive monthly increase. Meanwhile, Japan’s unemployment rate fell to 2.4%, beating the 2.5% forecast and reaching its lowest level in a year.
The figures strengthen expectations that the BoJ could raise its policy rate at the September 18 meeting. Reports suggest policymakers may even consider moving faster than the roughly twice-yearly tightening pace followed since the end of Japan’s prolonged monetary stimulus. Japanese government bond yields have already climbed to record highs amid these expectations.
However, stronger domestic data have failed to translate into Yen gains because the US-Japan rate differential remains substantial. Federal Reserve Chair Kevin Warsh recently signaled that policymakers still need greater confidence that inflation is moving sustainably toward the 2% target. Markets have consequently increased expectations for further US rate hikes.
Futures now price more than a 55% probability of a quarter-point Fed hike on September 16, with the probability of at least one hike by October approaching 85%. A second increase by December is priced at roughly 38%.
The BoJ is scheduled to make its decision just two days after the Fed. Even if Japan raises rates to 1.25% while the Fed holds its target range at 3.75%-4.00%, the interest-rate gap would remain around 250 basis points.
Therefore, the Yen may struggle to benefit from stronger Japanese inflation unless the BoJ tightens while the Fed remains on hold.
Trade idea:
USD/JPY remains bullish above 159.00; buying dips toward 159.30 could target 161.00, while a sustained break below 158.80 would weaken the bullish structure.