USD/JPY slips as Japan’s core inflation hits two-year high
- The Japanese Yen extends gains, with USD/JPY falling to near 143.00 during European hours on Friday.
- Japan’s core CPI rises 3.5% YoY in April, the highest in two years and above expectations.
- Headline inflation stands at 3.6%, the same as the previous month and the lowest since December.
The Japanese Yen (JPY) continues to appreciate against the US Dollar (USD), extending gains after Japan’s core consumer inflation surprised to the upside. The USD/JPY pair slipped below 144.00 after posting a modest gain on Thursday to trade near 143.00 during the European session on Friday, down over 0.50% on the day.
Japan’s National Consumer Price Index (CPI) rose 3.6% YoY in April, matching March’s figure and marking the lowest reading since December, while the core CPI, which excludes fresh food prices but includes energy, rose 3.5% YoY, up from 3.2% in March and slightly above the market forecast of 3.4%. This marks the highest core inflation print in two years, signaling persistent price pressures in the economy.
The latest rise in inflation was fueled mainly by a sharp jump in the prices of food, which surged 7.0% YoY as many companies hiked prices in April, with rice prices nearly doubling by 98.6% from a year ago.
The latest inflation data has stoked fresh speculation that the Bank of Japan (BoJ) could consider tightening policy further in the coming months. BoJ Deputy Governor Shinichi Uchida indicated earlier in the week that the central bank could continue raising interest rates if Japan’s economy rebounds from the hit of higher US tariffs, noting that inflation is likely to stay near the 2% target if conditions unfold as projected. The BoJ decided to keep its key short-term interest rate unchanged at 0.50% in its May meeting.
That said, a Reuters poll conducted between May 7 and May 13 showed that most economists expect the BoJ to keep interest rates unchanged through September. However, a slight majority favoured a rate hike before the end of the year, reflecting growing expectations of a gradual policy shift as inflation remains elevated.
The Yen also draws support from a broadly weak US Dollar, as broader sentiment remains cautious, and mounting US fiscal risks and geopolitical uncertainty curb investor appetite for the Greenback. The US Dollar index (DXY), which tracks the USD against a basket of six major currencies, failed to gain traction despite upbeat preliminary S&P Global Purchasing Managers’ Index (PMI) data for May released on Thursday and reversed from the 100.00 mark to trade around 99.30, marking a fresh weekly low.
On the trade front, Prime Minister Shigeru Ishiba has called the US tariffs, including 25% on automobiles, a "national crisis" for the world's fourth-largest economy. Japan’s top trade negotiator, Ryosei Akazawa, departed for Washington on Friday to begin a third round of talks to ease trade tensions and avert further economic fallout.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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