Japan’s Inflation Stays Elevated, Sparking Renewed Rate Hike Expectations and Yen Volatility
Japan’s inflation continues to outpace U.S. levels, with the headline rate still running nearly 100 basis points higher.
Just as yen stabilization seemed possible, fresh inflation data has reignited concerns over persistent price pressures.
Official figures released Friday show Japan’s core inflation—which excludes fresh food—rose 3% year-over-year in February. Although slightly lower than January’s 3.2%, it still exceeded the consensus forecast of 2.9%. The headline consumer price index (CPI) declined to 3.7% from 4%, yet both metrics remain well above the Bank of Japan’s (BOJ) 2% target, reinforcing Governor Haruhiko Kuroda’s assertion that Japan has overcome its deflationary struggles.
Stubborn inflation, coupled with wage gains from the annual shunto labor negotiations, has bolstered expectations for a BOJ rate hike. A potential tightening of monetary policy could drive a yen rally, a development that historically exerts pressure on risk assets such as cryptocurrencies.
As of writing, the dollar-yen (USD/JPY) pair traded at 149.22, reflecting a near 300-pip rebound since March 11, signaling renewed yen weakness, according to TradingView data.
However, strengthening Japanese bond yields indicate the possibility of a more resilient yen. The narrowing U.S.-Japan 10-year bond yield spread has lent support to the currency, with Japan’s 10-year bond yield surpassing 1.5% and the 30-year yield exceeding 2.5%, both marking multi-decade highs.
If the yen strengthens further, risk aversion may return, reminiscent of the market conditions observed in August last year.
