Japanese inflation data released this Friday show that the CPI (consumer price index) remained stable in May. Government energy subsidies are doing all the work: they’re holding back core price increases. But take away that artificial boost, and inflationary pressure remains very much present beneath the surface. 📉
🔍 What’s going on?
The Japanese government continues to inject billions of yen in subsidies to keep electricity and fuel prices under control. As a result, overall inflation remains moderate in the official statistics.
But core inflation—which excludes the volatile effects of energy and fresh food—continues to rise. It’s this measure that the Bank of Japan closely monitors to calibrate its monetary policy.
💡 Why does this matter?
For forex traders, this sends a mixed signal for the USD/JPY pair. At the time of writing, the pair is trading around 161.10. If the BoJ believes that actual inflation is becoming firmly entrenched, it could accelerate the normalization of its ultra-accommodative policy.
But as long as subsidies remain in place, official figures will stay low. This gives the BoJ room to delay rate hikes, especially given that the Fed is keeping its rates high. The interest rate differential remains favorable to the dollar.
📊 Our View
We remain wary of this apparent calm. Subsidies are merely fiscal window dressing.
Japan is accumulating a colossal public debt (over 250% of GDP), and these subsidies are a heavy burden on public finances. Sooner or later, they will have to be eliminated or scaled back. And when that day comes, official inflation will suddenly catch up with actual inflation. The BoJ knows this, which is why it is proceeding cautiously with raising its rates. In our view, USD/JPY remains a clear directional trade: as long as the Fed keeps its foot on the brake and Tokyo dithers, the yen will remain structurally weak. The interest rate differential points to a strong dollar against the yen.
We expect USD/JPY to test the 162 level in the coming weeks. For French traders: stay long on the dollar against the yen, with a stop below 159 to limit risk in the event of a surprise reversal by the BoJ.
✅ Key Takeaways
- Japan’s CPI remains stable thanks to government energy subsidies
- Core inflation continues to rise despite subdued official figures
- USD/JPY is benefiting from the dollar-favorable interest rate differential
- Subsidies are costly and not sustainable in the long term
- The BoJ retains room to delay rate hikes
What do you think? Do you think the yen will continue to depreciate against the dollar, or will the BoJ eventually surprise the market with more aggressive tightening?
🔎 See also
To learn more, check out all our economic analyses on ActuTrading Economy 📈
Source: ForexLive
