Commerzbank’s Volkmar Baur reports that Japanese authorities appear to be intervening around USD/JPY 157 after the pair briefly hit 160.72. Tokyo inflation data show headline gains driven solely by energy, while core inflation has fallen to a one‑year low. The bank warns that conflict-related sentiment could keep core inflation subdued, undermining prospects for Bank of Japan rate hikes and pressuring the Japanese Yen.

Energy-driven CPI masks soft underlying prices

"After the Japanese government apparently intervened in the foreign exchange market on Thursday —following the USD-JPY’s temporary high of 160.72 — the Ministry of Finance appears to remain active in the market even during Japan’s current Golden Week. Price movements at least suggest that, for the time being, efforts are being made to stabilize the exchange rate at 157."

"This is also evident from a look at the inflation figures for the Greater Tokyo Area, which were released on Friday. The overall rate did rise from 1.4% to 1.5%. And on a seasonally adjusted basis, the annualized 3-month change of 2.2% was once again above the central bank’s target. However, this is solely due to the rise in energy prices."

"By contrast, there are still no signs of second-round effects even in the second month of the conflict. On the contrary, the core rate — as defined by Western standards (i.e., excluding food and energy) — actually fell from 1.4% to 1.0%, reaching its lowest level in over a year. While 0.1 percentage points of this decline are attributable to a one-off effect related to kindergarten fees, the drop in the core rate remains significant."

"There is therefore a risk that the Iran conflict could weigh so heavily on sentiment in Japan that core inflation remains relatively low despite the energy-driven rise in the headline rate, casting further doubt on interest rate hikes by the Bank of Japan. This would certainly put additional pressure on the JPY."

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