Commerzbank’s Volkmar Baur highlights that the Japanese Yen (JPY) remains weak despite only mildly softer April inflation, as rising global interest rates and Japan’s high debt burden weigh on the currency. Elevated energy prices linked to the Iran conflict are hurting the Japanese economy, though a resolution, lower Oil prices and a Bank of Japan (BoJ) rate hike in mid-June could offer some relief.

High energy costs and BoJ outlook

"The inflation figures from Japan released this morning did not really contain much new information, so the Japanese yen’s reaction was muted. While the figures came in slightly below the median expectations reported by Bloomberg, it is important to note that these are still the national figures for April, and secondly, the downward surprise was due to a one-off effect related to school fees, which should have no impact on underlying inflation."

"The Japanese yen, however, has continued to struggle in recent weeks. Rising global interest rates are weighing on the currency, as the country’s high nominal debt could quickly turn this into a significant fiscal burden. The government, however, hasn’t helped matters in recent days by already discussing a supplementary budget roughly one month after the budget for this fiscal year was approved."

"As long as the conflict persists, the Japanese yen will continue to struggle. A prompt resolution, lower oil prices, and the expected interest rate hike by the Bank of Japan in mid-June, on the other hand, could provide relief."

"The main driver for the JPY, however, remains the uncertainty surrounding the Iran conflict and the resulting high energy prices. These are weighing on the Japanese economy, as was evident once again in yesterday’s flash estimates for the Purchasing Managers’ Index, and thus on the currency as well."

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