Japan’s CPI heats up, but USD/JPY bulls catch a temporary MoF break

Japan’s hotter-than-expected CPI had all the makings of a knockout punch for USDJPY bulls, but instead, it turned into a slugfest as high-ranking officials stepped in to cool the yen rally. Just as traders were gearing up for a major shift in BOJ expectations, Finance Minister Katsunobu Kato threw in a reality check—warning that rising bond yields could put severe pressure on Japan’s already bloated fiscal situation.

"An increase in long-term yields means higher interest rates and increased debt-servicing costs,” Kato told reporters on Friday. "This could put pressure on policy spending, given Japan’s staggering debt-to-GDP ratio.” That was all it took to siphon some of the bull juice out of Yen, reminding traders that the BOJ isn’t operating in isolation—it’s still tethered to the Ministry of Finance (MOF), which has its own set of concerns.

That warning didn’t come out of thin air—Japan’s benchmark 10-year bond yields surged to 1.455%, their highest level since 2009, as markets digested the inflation shock and recalibrated expectations for the BOJ’s tightening path. While JGBs slipped lower in price on the back of the CPI print, Kato’s remarks had traders rethinking whether the BOJ would really push ahead aggressively or if they might be nudged into a more measured, summer one-and-done approach in 2025.

Most economists expect the next BOJ rate hike to land in the summer, but the market isn’t entirely convinced. Stronger-than-expected Q4 GDP growth figures, notably hawkish remarks from BOJ board member Hajime Takata, and a hotter CPI have amplified speculation that the tightening cycle could move faster than anticipated.

But let’s not forget Japan’s debt math—at 232.7% of GDP, Tokyo is running one of the most leveraged economies on the planet. However, as long as the debt is issued in yen, the BOJ remains the buyer of last resort. That means Japan may face inflation or currency risks, but a full-scale fiscal crisis remains a distant scenario.

For now, the USDJPY outlook hangs on a knife’s edge—inflation is heating up, but the BOJ’s hands aren’t entirely free.

Asia kicks off in a cautious mood—US consumer health in focus

Meanwhile, Asian markets kicked off in a hesitant fashion, with major exporters carefully gauging the health of the U.S. consumer—the last bastion of global demand. A disappointing forecast from Walmart has only deepened concerns that American consumers—once the unsinkable driver of global growth—might finally be feeling the squeeze.

However, Tokyo investors are likely breathing a sigh of relief following the Ministry of Finance's verbal intervention.