JPY: Tokyo inflation data warns of July BoJ rate hike – ING

Tokyo May inflation data surprised on the upside, ING's FX analyst Chris Turner notes.

Risks are clearly skewed to the downside for the USD/JPY

"At the 3.6% YoY, the ex-food reading was the highest since early 2023. The data supports her view that the risk of a Bank of Japan rate hike in July is underpriced by the market. Currently, investors only attach a 14% probability to such an outcome."

"A hike in July would certainly support the yen. It would also make it a little less expensive for Japanese holders to FX hedge their US assets. Those investors from a low interest rate region (i.e., Japan) tend to have lower hedge ratios on US assets."

"Clearly, a reduction in hedging costs would add to the current narrative that the global investor community wants to raise its dollar hedge ratios. We have a 140 year-end forecast for USD/JPY. But the risks are clearly skewed to the downside here."