Japanese Yen strengthens as Tokyo CPI does little to temper BoJ rate hike bets

USD/JPY drifts lower as reviving bets for more BoJ rate hike provide a modest lift to the JPY.
Reduced bets for more rate cuts by the Fed act as a tailwind for the USD and spot prices.
The pair is poised to register its second straight weekly gains as traders look to the US PPI.

Haresh Menghani FXStreet

The USD/JPY pair attracts some sellers for the second straight day following the release of Tokyo inflation figures and slides to the 155.65 area during the Asian session on Friday. Spot prices, however, remain on track to register gains for the second week in a row, and the fundamental backdrop warrants caution before positioning for an extension of the corrective fall from a two-week top, touched on Wednesday.

Data released earlier today showed that the core consumer inflation in Tokyo – Japan's capital city – cooled below the Bank of Japan's (BoJ) 2% target for the first time since 2024. The inflation, however, remains well above historic levels, which, along with the recent hawkish comments from BoJ officials, keeps hopes alive for further tightening by the central bank and provides a modest lift to the Japanese Yen (JPY).

In fact, BoJ Governor Kazuo Ueda reiterated on Thursday that the basic stance is to continue raising rates if the likelihood of our economic and price forecasts materialising heightens. Moreover, BoJ Board Member Hajime Takata said that the central bank must conduct further rate hikes in a gradual manner. This, along with trade jitters and geopolitical risks, benefits the safe-haven JPY and weighs on the USD/JPY pair.

Meanwhile, reports suggested that Japan's Prime Minister Sanae Takaichi had expressed reservations about additional monetary tightening ‌during her meeting with the governor. Furthermore, concerns about Japan's fiscal health might hold back the JPY bulls from placing aggressive bets. The US Dollar (USD), on the other hand, remains close to the monthly high and could further support the USD/JPY pair.

Traders trimmed their bets for more aggressive policy easing by the US Federal Reserve (Fed) after minutes from the January FOMC meeting showed that the central bank is in no hurry to cut interest rates further. Moreover, officials discussed the possibility of raising rates if inflation does not cool. This offset concerns about the economic fallout from US President Donald Trump's policies and supports the USD.

The focus now shifts to the release of the US Producer Price Index (PPI), due later during the North American session. Apart from this, comments from influential FOMC members will play a key role in driving the USD demand and providing some impetus to the USD/JPY pair. Meanwhile, the aforementioned fundamental backdrop suggests that any subsequent fall is likely to be bought into.

Economic Indicator

Tokyo CPI ex Food, Energy (YoY)

The Tokyo Consumer Price Index (CPI), released by the Statistics Bureau of Japan on a monthly basis, measures the price fluctuation of goods and services purchased by households in the Tokyo region. The index is widely considered as a leading indicator of Japan’s overall CPI as it is published weeks before the nationwide reading. The gauge excluding food and energy is widely used to measure underlying inflation trends as these two components are more volatile. The YoY reading compares prices in the reference month to the same month a year earlier. Generally, a high reading is seen as bullish for the Japanese Yen (JPY), while a low reading is seen as bearish.

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