Japanese Yen weakens on soft Japan CPI inflation data

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The USD/JPY pair gains ground to around 159.10 during the early Asian session on Friday. Softer Japan inflation data weighs on the Japanese Yen (JPY) against the US Dollar (USD). The US May Michigan Consumer Sentiment Index report will be released later on Friday.

USD/JPY gathers strength to near 159.10 in Friday’s early Asian session.
Japan's core CPI inflation slowed to a four-year low in April.
FOMC Minutes signaled broad support for a Fed rate hike if inflation persists.

Data released by the Japan Statistics Bureau on Friday showed that the National Consumer Price Index (CPI) rose by 1.4% YoY in April, compared to 1.5% in March. Meanwhile, Japan's core CPI climbed by 1.4% YoY in April, marking the slowest annual pace in four years.

However, analysts expect inflation to accelerate in the coming months, as elevated oil costs and supply disruptions caused by the Middle East conflict prompt firms to raise prices for a broad range of products.

The Japanese Yen edges lower in an immediate reaction to a softer inflation report. The data is among the factors the Bank of Japan (BOJ) will scrutinize at June's policy meeting, where the board is widely expected to raise its short-term policy rate to 1.0% from 0.75%.

Minutes of the April Federal Open Market Committee (FOMC) meeting released on Wednesday showed that a majority of Federal Reserve (Fed) officials warned the central bank would likely need to consider hiking interest rates if inflation continued to run persistently above their 2% target. The minutes highlighted the deepening concern among Fed officials about inflationary pressures driven by the Iran war.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.