USD/JPY Fundamental Daily Forecast – Surge in Tokyo Prices Supports BOJ’s Plan to Upgrade Inflation Forecasts

The Dollar/Yen is trading flat on Tuesday. Capping gains is the Bank of Japan’s surprise tweak to its yield curve policy late last year and expectations the Federal Reserve will begin to slow the pace of its rate hikes.

Limiting losses, however, are hawkish comments from Fed members ahead of speeches from BOJ and Fed policy chiefs.

At 07:19 GMT, the USD/JPY is trading 132.107, up 0.218 or +0.17%. On Monday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $70.82, up $0.17 or +0.24%.

Central Bank Speeches Later Today

Investors will turn their attention to a speech by Bank of Japan Governor Haruhiko Kuroda at 10:10 GMT. He is expected to deliver an outlook briefing designed to make the job easier for his successor. Kuroda will step down in April.

Later today at 14:00 GMT, Fed Chair Jerome Powell will give a speech on central bank independence. Traders are hoping he makes comments that could give further clarity on the outlook of the Fed’s rate-hike path.

Consumer Inflation in Japan’s Capital Exceeds BOJ Target for 7^th Month

Core consumer prices in Japan’s capital, a leading indicator of nationwide trends, rose a faster-than-expected 4.0% in December from a year earlier, exceeding the central bank’s 2% target for a seventh straight month in a sign of broadening inflationary pressure.

The increase, which was the fastest pace in four decades, will likely underpin market expectations the Bank of Japan (BOJ) may phase out its massive stimulus by tweaking its yield curve control policy.

The rise in the Tokyo core consumer price index (CPI), which excludes fresh food but includes fuel, exceeded a median market forecast of 3.8% and a 3.6% gain seen in November, government data showed on Tuesday.

The last time Tokyo inflation was faster was April 1982, when the core CPI was 4.2% higher than a year before.

The Tokyo core-core CPI index, which excludes fuel as well as fresh food, was 2.7% higher in December than a year earlier, picking up from the 2.5% annual gain seen in November.

The rise in the Tokyo CPI heightens the chance that nationwide consumer inflation likely stayed above the BOJ’s 2% target in December.

Short-Term Outlook

Although Governor Haruhiko Kuroda has dismissed the chance of a near-term interest rate hike on the view the bank must keep supporting the economy until the current cost-push inflation turns into a demand-driven one accompanied by higher wages, today’s Tokyo inflation report likely means the BOJ will upgrade its inflation forecasts at a rate review next week.

The move will help the Bank of Japan (BOJ) maintain its conviction that robust domestic demand will keep inflation sustainably around its 2% target in coming years.

Traders are expecting the BOJ to remain cautious about tightening policy too fast after a report on household spending from November unexpectedly fell 1.2% from a year earlier. This marked the first drop in six months in a sign of the fragility of private consumption.