USD/JPY falls as Japanese inflation moderates, US fiscal uncertainty weighs

• USD/JPY trades lower on Friday following softer inflation figures in Japan and a fiscal uncertainty surge in the US.
• The easing in price pressures may temper expectations of tightening by the Bank of Japan.
• The US Dollar remains fragile amid fiscal uncertainty and mixed US data.

USD/JPY is trading around 154.90 on Friday at the time of writing, down 0.13% on the day. The Japanese Yen (JPY) gains modest support after inflation data showed a clear moderation in price pressures at the start of the year, while the US Dollar (USD) tumbles after the Supreme Court rules Trump's national security tariffs unlawful.

In Japan, the National Consumer Price Index (CPI) rose 1.5% YoY in January, down from 2.1% in December, marking the slowest pace since March 2022. The index excluding fresh food eased to 2%, from 2.4% previously, in line with expectations. The so-called core-core measure, which excludes both fresh food and energy, also slowed to 2.6%, compared with 2.9% in the prior month.

This cooling in inflation could temper expectations of a swift monetary tightening by the Bank of Japan (BoJ). Investors are now reassessing the timing and magnitude of any further policy normalization, after months of speculation about a gradual exit from ultra-accommodative settings. A sustained slowdown in price growth would complicate the central bank’s ability to justify additional rate hikes in the near term.

However, some economists argue that underlying price dynamics remain relatively solid. Société Générale analysts note that the recent disinflation is partly driven by temporary factors, including lower energy prices and certain fiscal measures, while services inflation remains firm. According to the bank, the intensity of service-sector price revisions in January suggests that the April adjustments could continue to support the inflation path, keeping the prospect of gradual BoJ normalization alive.

On the US side, the US Dollar is trading in a more uncertain environment. The US Supreme Court’s ruling that broadly invalidated the application of certain tariffs on “national security” grounds has weighed on the Greenback, fueling uncertainty around trade policy. In addition, fourth-quarter Gross Domestic Product (GDP) expanded at an annualized rate of 1.4%, below expectations, while S&P Global’s business activity indicators pointed to a slight slowdown in February. The Michigan Consumer Sentiment Index fell to 56.6 in February from 57.3 in January, and was below expectations.