Governor Ueda missed an opportunity yesterday to verbally prepare the market for a possible further interest rate hike in Japan, thereby casting doubt on whether the central bank is prepared to take such a step again this year. As a result, the JPY showed significant weakness during the course of yesterday. USD/PY rose to almost 154.5, marking its highest level since the beginning of the year. Over the whole of October, the JPY lost almost 5% against the US Dollar (USD), Commerzbank's FX analyst Volkmar Baur notes.

JPY might slowly gain some momentum

"A reminder that further interest rate hikes, albeit cautious ones, could well be appropriate came this morning in the form of the Tokyo CPI. The rate of price increases for the greater Tokyo area is a reliable precursor to nationwide inflation figures and has the advantage of being published much earlier. While last Friday we saw the release of the nationwide figures for September, today's figures for Tokyo are already those for October."

"And in October, inflation in Tokyo rose again significantly, by 2.8% compared to the previous year, after standing at 2.4% in September. Now, we shouldn't sound too much alarm. In this case, the increase is due to a special effect related to the expiry of a discount on water charges. Price pressure has therefore not suddenly spread across the board. However, it also shows that inflation, at least in terms of the overall rate, is well above the central bank's target. Even if it remains true that, excluding food and energy, the annual rate remains below the 2% inflation target."

"All in all, we expect the central bank to slowly begin preparing the market over the coming weeks for an interest rate hike in December, which we still anticipate. In this case, the JPY should stabilize over the coming weeks and slowly gain some momentum."