Core inflation in Japan is expected to remain below 2% for the fourth consecutive month in May 2026, according to a Reuters survey of economists. The Bank of Japan had hoped for a sustained return above its target, but the numbers aren’t following suit. This hasn’t been seen in months. 📉
🔍 What’s happening?
Analysts surveyed by Reuters expect inflation excluding fresh food to remain stuck below the 2% threshold that the Bank of Japan has been targeting for years. This marks the fourth consecutive month that price momentum has slowed rather than accelerated.
At the time of writing, USD/JPY is trading at 160.2656, reflecting the yen’s persistent weakness against the dollar. The prospect of prolonged low interest rates in Japan continues to weigh on the Japanese currency.
💡 Why does this matter?
For those of us trading the yen, this is a clear signal. The Bank of Japan isn’t going to normalize its policy anytime soon. As long as inflation remains sluggish, it’s impossible for the BoJ to raise rates or scale back its massive asset purchase program.
The result: the interest rate gap between Japan and the rest of the world (Fed, ECB) remains wide open. The yen continues to get crushed, and USD/JPY is quietly climbing toward levels not seen in decades. For Japanese importers, the bill is getting bigger. For traders, the trend is clear.
📊 Our view
We remain bearish on the yen. Period.
As long as core inflation remains below 2%, the Bank of Japan won’t budge an inch on rates. The minutes from the latest Monetary Policy Board meeting show that the governors want sustained signs of accelerating prices before taking any action. Yet these signs are not materializing. A fourth consecutive month below target is a clear failure of the monetary stimulus strategy. In Europe, the ECB is closely monitoring the situation in Japan. Christine Lagarde has repeatedly warned of the risks of a similar deflationary trap if the eurozone were to cut rates too quickly. For French traders following the EUR/JPY, this is a point to keep in mind: the pair could surge further if the divergence between the ECB and the BoJ widens.
We expect USD/JPY to test 165 by summer if June’s data confirms the trend. For French traders: stay long on the dollar against the yen, or hedge via EUR/JPY if you want to limit direct exposure to the greenback.
✅ Key takeaway
- Japanese core inflation remains below 2% for the fourth consecutive month
- The Bank of Japan cannot normalize its policy under these conditions
- USD/JPY at 160.27 reflects the widening interest rate gap between Japan and the rest of the world
- The yen remains structurally bearish as long as inflation doesn’t pick up
- EUR/JPY could also surge if the ECB/BoJ divergence widens
What do you think? Are you betting on a continued rally in USD/JPY, or are you waiting for a pullback to enter the market?
🔎 See also
For more insights, check out all our Forex analyses on ActuTrading Forex 📈
Source: Reuters, Bank of Japan
