Japanese Yen Forecast: USD/JPY Falls as Tokyo Inflation Heats Up

USD/JPY reclaimed 154 as the Fed downplayed a December rate cut and the Bank of Japan called for more time before raising rates. As USD/JPY neared a potential intervention zone, key Japanese economic data could revive expectations of a December or potentially January rate hike, lifting demand for the yen.

On Friday, October 31, Japanese data signaled a steady labor market, rising inflation, and a rebound in household spending. These trends are key ingredients for a more hawkish BoJ policy stance. BoJ Governor Kazuo Ueda continued to raise concerns about US tariffs, stating:

“We would like to spend a bit more time scrutinizing wages and price moves. We will have more data on how companies, hit by 15% tariffs, would respond and set wages including for next year.”

Tokyo Inflation Heats Up as Unemployment Drops

Tokyo inflation accelerated in October, pressuring the BoJ to raise interest rates. The annual inflation rate rose from 2.5% in September to 2.8%, moving further above the BoJ’s 2% target. Meanwhile, the so-called ‘core-core’ inflation rate increased from 2.5% in September to 2.8% in October.

Economists see Tokyo’s inflation numbers as a leading national inflation indicator, suggesting a pickup in headline and underlying inflation.

Governor Ueda commented on inflation during the Bank of Japan’s press conference on Thursday, October 30, stating:

“We will continue to scrutinize developments in underlying inflation, and whether food price rises, if they persist, could cause upside or downside risks to the price outlook.”

While inflation picked up, Japan’s unemployment rate remained at 2.6% in September. For context, unemployment has been declining since the COVID-19 pandemic, though it is at its highest level since July 2024.

Although stable in September, unemployment remains above recent lows, which could weigh on wage growth. Slower growth may curb consumer spending, potentially dampening demand-driven inflation. A cooler inflation outlook would support a less hawkish BoJ rate path.

Nevertheless, the inflation data had more influence on USD/JPY, which dropped from 154.139 to 153.953 after the data release.

Japan Retail Sales Rebound

While the Tokyo inflation figures pushed USD/JPY below 154, retail sales figures also required attention. Retail sales rose 0.3% month-on-month in September, rebounding from a 1.1% drop in August.

An upswing in consumer spending could bolster the economy, given that private consumption contributes roughly 55% to Japan’s GDP.

The USD/JPY pair extended losses after the retail sales figures, falling to a morning low of 153.837.

Today’s economic indicators signaled a potential pickup in economic momentum and rising national inflation, supporting a more hawkish BoJ rate path. Given these dynamics, USD/JPY maintains a bearish bias despite Powell downplaying the odds of a December rate cut. However, traders should closely monitor comments from Prime Minister Sanae Takaichi, an advocate for ultra-loose monetary policy.

Fed Speakers and Capitol Hill in Focus

While Japanese data may fuel speculation about a BoJ rate hike, the continued US government shutdown will likely delay key economic reports. In the absence of September’s Personal Income and Outlays Report, traders should closely monitor Fed speeches.

FOMC members Lorie Logan and Beth Hammack, along with Fed Reserve Bank of Atlanta President Raphael Bostic, are due to deliver speeches later in the Friday session. Economists consider the three regional bank presidents relatively hawkish, suggesting they may argue against a December rate cut.

Calls to delay a December Fed rate cut would reinforce Powell’s stance and may sustain US dollar strength. While short-term dollar strength could lift USD/JPY toward 154.45, the broader outlook remains bearish amid BoJ policy normalization.

According to the CME FedWatch Tool, the chances of a 25-basis-point cut in December fell from 91.1% on October 23 to 66.6% on October 29. This sharp repricing followed Powell’s press conference.

USD/JPY Scenarios: Monetary Policy Divergence

• Bearish USD/JPY Scenario: hawkish BoJ rhetoric and dovish Fed commentary could push USD/JPY toward the 153 level.
• Bullish USD/JPY Scenario: dovish BoJ comments and hawkish Fed chatter could send USD/JPY toward 155.

Read the full USD/JPY forecast, including chart setups and trade ideas.

Key Market Drivers to Watch Today:

• Bank of Japan commentary.
• Japanese government intervention threats.
• Developments on Capitol Hill.
• Fed speakers.

For more in-depth analysis, review today’s USD/JPY trading setups in our latest reports and consult the economic calendar.