U.S. Dollar Pushes Yen Above 114

After years of deflation, Japanese inflation indicators continue to point upwards. The latest gauge to confirm the upswing was BoJ core inflation for December, which rose from 0.8% to 0.9% y/y, above the consensus of 0.7%. Later today, the Services Producer Price Index is expected in at 1.0%. Producer inflation has been running at a faster clip than consumer inflation, as businesses have been reluctant to pass on higher costs to consumers.

The weak yen has widely been blamed as being a key factor in higher inflation, but BoJ Governor Haruhiko Kuroda had a different take earlier today, saying that the surge in global commodities was a much bigger factor in boosting Japan’s inflation than the yen. Kuroda stated that he would not consider the yen as being “abnormally” weak and causing higher inflation. This would seem to indicate that the BoJ is not concerned, at least for now, with the depreciation of the yen, with the USD/JPY rising 3.6% since September 1st. The BoJ would not lose any sleep if the yen continued to lose ground, as this would likely lead to higher inflation.

The uptrend in inflation is a new development in Japan, but the bank is unlikely to shift away from its ultra-accommodative policy or raise rates anytime soon. Governor Kuroda has said that a rise in inflation that does not include higher wage growth is not sustainable, which sounds very much like the ‘transient inflation’ phrase that Fed Chair Jerome Powell was using until recently.

Investors are anxiously awaiting the FOMC meeting on Wednesday, with the Fed poised to raise rates in March after a 3-year hiatus. There has also been some speculation that the Fed might depart from incremental hikes of 0.25% and announce a dramatic 0.50% move. This would provide a ‘double punch’ of curbing inflation and sending the markets a strong message in order to restore credibility, which has taken a hit from some market participants that feel that the Fed has been too slow in its response to surging inflation.