Could tonight’s Japanese inflation affect the USDJPY?

Japanese inflation data will be out earlier than expected, on Thursday, as Japan is closed on Friday for Labor Thanksgiving Day. The National October CPI is forecast at 1.3% y/y from 1.2% overall, and steady at 1.0% on a core basis. Although the annual inflation has been improving since May, it remains well short of the BoJ’s 2.0% goal.

BOJ keeps a close eye on this particular reading and more precisely on the core rate, as it is a measure of the average change over time in the prices paid by consumers for goods and services, excluding fresh food. This measure will give an indication to BOJ on the lack of prices pressure in Japan due to long lasting ultra-accommodative policy.

Japanese inflation is on the upswing however, with sluggish progress in 2018 after it languished at low levels the past 2 years and had fallen a bit in September as well. Hence Japan’s long run of extreme monetary stimulu, once again raised concerns and negative judgements regarding the effect of its policy and the negative interest rates (currently at -0.1%) over Japan’s economy.

In the October review of monetary policy and quarterly forecast update, BoJ left policy on hold but trimmed inflation projections. The short-term rate remained at -0.1% and 10-year rates at near 0%. The vote by the board was by a 7-2 majority, also as expected. Core consumer inflation projection for the current fiscal year ending in March 2019 was trimmed to 0.9% from 1.1% previously forecast, and to 1.4% from 1.5% for fiscal year 2019-20.

Therefore, even in the case of a positive surprise on tonight’s Japanese inflation data report, BOJ is widely expected to keep monetary policy unchanged. Hence despite the sluggish progress and the strong Japanese economic growth, if the report is close to expectations, BOJ is likely to remain in ultra-accommodative mode for an extended period even as the other core central banks remove accommodation (Fed) or cut QE (ECB).

This argument can also be justified by the BOJ remarks in the last meeting, in which BoJ warned that chronic ultra-accommodative policy “could destabilize the financial system,” although these risks were not judged to be significant at the present juncture. Among the core central banks, the BoJ is firmly poised to be “low for longest,” and that announcement again drove home that projection.

In the forex market, a higher than expected reading tonight should be taken as positive/bullish for JPY, while a lower than expected reading should be taken as negative/bearish for JPY. However, in the last weeks, the multitude of risks from trade tensions to Brexit concerns and Italy’s budget rejection have resulted in the risk-sensitive Yen’s strength. Therefore the CPI outcome is unlikely to cause high volatility Yen crosses.

Meanwhile, if we turn our attention to USDJPY’s fundamentals, i.e. yield differentials and the associated contrast between Fed and BoJ policy paths, they remain supportive for the pair although periodic episodes of risk aversion have been an intermittent offsetting bearish force.

Hence, in the short term, a positive outcome in the CPI, could boost Yen, and therefore we could see USDJPY retesting immediate Support between the 112.63-112.75 area, which coincides with yesterday’s low and the confluence of the 20-period SMA in the 4-hour chart and the 23.6% Fib. retracement level since November 12 peak. Further losses could turn attention towards November’s bottom. Resistance holds at 50% Fib. level, at 113.25. A break of this barrier could shift the pair to the 113.50-113.60 area.