Inflation Spikes in Japan As Dollar Falls

In Japan, the yen had a good week last week, but it is back to its old ways today, falling for the second day in a row. Today, risk-on sentiment is putting pressure on the Yen and the Dollar. The USD/JPY exchange rate is currently at 113.91, up 0.18 percent for the day. During the New York session, the GBP/JPY cross-currency pair rose 0.38 percent, trading at 157.15 at the time of writing.

The mood of investors is positive, as seen by increasing US market indices, which rose between 0.19 percent and 0.36 percent. Despite rising inflation and central bank tightening monetary policy, factors such as Q3 good US corporate earnings have calmed market players. Furthermore, the risk-on sentiment has weakened the safe-haven character of the Japanese yen, which remains the session’s laggard, dropping 0.39 percent against major G8 currencies.

In terms of monetary policy, the United States and Japan are headed in separate directions. At the FOMC meeting next week, the Fed is expected to tighten policy by curtailing its bond-buying program. Despite Fed Chair Powell’s assurances that “a taper yes, a rate hike no,” markets will speculate on the timing of a rate hike, especially with inflation showing no indications of abating anytime soon. The Fed is expected to raise rates in 2023, but it might happen sooner if the US economy improves faster than expected next year.

Inflation in Japan increases

For years, inflation in Japan has hovered below zero. Governments tried, but in most cases failed to create inflation that refused to move higher. Japan has been in a deflationary period since 2011, but this trend may end. The CPI was unchanged in August and rose 0.1% in September (YoY).

This marks the first achievement since March 2020, when the Covid pandemic began. The Bank of Japan’s core CPI, which is the Bank of Japan’s preferred inflation indicator, rose 0.6% in September, the fastest pace since July 2019.

The main driver of inflation is higher energy costs as crude oil prices hit multi-year highs. Higher inflation is a new fact of life around the world, and wholesale inflation in Japan jumped 6.3%, the highest level since 2008. However, this has not led to higher consumer inflation, as businesses are reluctant to pass higher costs onto consumers.

A new election poll shows that the ruling LDP, led by new Prime Minister Fumio Kishida, will easily retain its majority in the lower house of parliament. Japan will go to the polls next week and Kishida is expected to introduce additional monetary easing and spending increases to boost inflation. Further weakness is likely to push the yen lower as other central banks find themselves in a tightening cycle, leading to widening yields between Japan and the US, as well as other G-10 countries.