Japan Core Inflation Beats Forecasts to Test the BoJ and Ultra-Loose

Highlights

• Inflation in Japan softened in May but came in hotter than expected.
• Prelim private sector PMIs for Japan and the US will move the dials today.
• Inflation numbers could nudge the Bank of Japan to tweak its Yield Curve Control policy.

It was a busy start to the Friday session on the Asian economic calendar. Prelim private sector PMIs for Australia drew interest ahead of inflation figures for Japan. With the markets looking for reasons for the Bank of Japan to tweak its ultra-loose monetary policy stance, the inflation numbers moved the dial.

Japan’s annual inflation rate softened from 3.5% to 3.2% in May, with core inflation easing from 3.4% to 3.2%. Economists forecast the headline inflation rate to accelerate to 4.1% and core inflation to soften to 3.1%.

The hotter-than-expected core inflation rate and sticky headline inflation could force the Bank of Japan to begin tweaking its ultra-loose monetary policy stance.

Last Friday, the Bank of Japan left monetary policy ultra-loose. However, the markets expect a tweak to the Bank’s Yield Curve Control (YCC) Policy. The Bank currently maintains a 0% cap on the 10-year bond yield.

USD/JPY Reaction to Japan Inflation Numbers

Ahead of the inflation figures, the USD/JPY fell to a low of 142.988 before rising to a pre-stat high of 143.180.

However, in response to the numbers, the USD/JPY rose to a post-stat high of 143.119 before falling to a low of 142.951.

This morning, the USD/JPY was down 0.08% to 142.991.

Next Up

Prelim private sector PMI numbers from Japan will draw interest this morning. Economists forecast the manufacturing PMI to fall from 50.6 to 50.0 and the services PMI to increase from 55.9 to 56.2.

However, investors should look beyond the headline PMIs and consider the inflation, new orders, and employment sub-components. Softer numbers could temper BoJ tweak bets.

Later today, the US private sector PMIs will likely have more impact. We expect the services PMI to draw more attention, with employment, new orders, and inflation as the focal points.

Away from the numbers, FOMC members Bullard and Bostic are on the calendar to speak today.