Dollar edges lower, BoJ inflation jumps

Last week, the Japanese yen recorded a winning week, but the currency is back to its old habits and is down for a second straight day. USD/JPY is currently trading at 113.91, up 0.18% on the day.

Japan inflation on the rise

For years, inflation in Japan has hovered below zero. Governments have tried and mostly failed to generate inflation, which has refused to budge higher. Japan has been mired in a deflationary period since 2011, but this trend may be over. CPI was unchanged in August and rose 0.1% in September (Y0Y). This marked the first gain since March 2020, at the start of the Covid pandemic. BoJ Core CPI, which is the Bank of Japan’s preferred inflation gauge, rose 0.6% in September, its fastest pace since July 2019.

The main driver behind the upswing in inflation is higher energy costs, as crude oil prices are at multi-year highs. Higher inflation is a new fact of life all across the globe, and wholesale inflation in Japan jumped 6.3%, its highest level since 2008. This has not translated into higher consumer inflation, however, as businesses have been reluctant to pass on higher costs to consumers. That means that the BoJ’s inflation target of 2 percent will continue to remain a ‘pie in the sky’ dream for quite some time.

A new election poll indicates that the ruling LDP party, led by the new Prime Minister Fumio Kishida will easily hold onto its majority in the Lower House of parliament. Japan goes to the polls next week, and Kishida is expected to implement additional monetary easing and spending in order to push inflation higher. Further easing will likely push the yen lower, as other central banks are in a tightening cycle, which has raised the yield differentials between Japan and the US, as well as other G-10 nations.

USD/JPY technical

• There is weak resistance at 114.32. Above, there is resistance at 115.14.

•  There is support at 113.05, protecting the 113 line. This is followed by 112.60.