Volkmar Baur at Commerzbank highlights that Greater Tokyo inflation has edged up and is now just below 2%, a positive backdrop for the Japanese Yen. With limited second-round effects from Oil and signs of structural normalization, the Bank of Japan can keep normalizing policy. Market pricing still assumes only one more hike, but additional moves could support JPY.

Inflation normalization supports Japanese Yen

"Data released this morning show that inflation in the Greater Tokyo Area rose slightly in June and remains just under 2%. This is definitely positive for the Japanese yen. In the short term, this is good because the inflation rate continues to show few signs of second-round effects due to the temporary rise in oil prices."

"Structurally, however, this is also positive because - after Japan was mired in deflation for a very long time - inflation now appears to be genuinely moving closer to the Bank of Japan’s 2% target."

"The normalization of inflation thus also means that the Bank of Japan can continue to move forward with its normalization of monetary policy."

"One member of the Bank of Japan’s Monetary Policy Board even declared this week that the 2% target has been achieved and urged that interest rates be raised more quickly from now on to reach what he considers the neutral interest rate of 2% (currently the policy rate is at 1%) as soon as possible."

"The market continues to price in only one additional interest rate hike by the Bank of Japan this year. Should there be any movement on this front, it is likely to provide support for the JPY."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)