Commerzbank’s Volkmar Baur notes that Tokyo inflation rose to 1.6% in February versus expectations for 1.3%, with consumer goods prices and retail sales surprising on the upside. He argues that stable inflation within the Bank of Japan’s target range is supportive for the Japanese Yen, as markets price a roughly 70% chance of an April rate hike and near‑certainty by June.

Slight inflation surprise backs BoJ tightening

"Inflation figures for the Japanese capital Tokyo released this morning indicate that inflationary pressure in Japan was slightly higher in February than most analysts had expected. The inflation rate rose from 1.5% in January to 1.6% in February, whereas a Bloomberg survey had predicted a decline to 1.3%."

"Prices for consumer goods such as clothing, shoes and furniture in particular appeared to rise more sharply month-on-month. In line with this, retail data for January was also released this morning, showing a 4.1% month-on-month increase in sales."

"All in all, this single data point on inflation should not be overrated. Looking at the second decimal place, for example, it can be seen that the annual inflation rate rose only from 1.54% to 1.55%. Seasonally adjusted, the monthly rate shows an unchanged price level."

"The JPY is responding positively to this morning's slight surprise on inflation and is gaining slightly against the USD. We also view it as positive that inflation is not falling too quickly, but is stabilising within the Bank of Japan's target range. Otherwise, the market could raise the question whether the Bank of Japan should continue to raise interest rates at all."

"The market is pricing in a key interest rate hike in April at around 70% and expects a move by June at the latest with almost 100% certainty. If this were not to happen, it would certainly weigh on the JPY."

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