Japanese Yen gathers strength as CPI inflation exceeds target, backing BoJ rate hikes
- USD/JPY tumbles to around 156.25 in Friday’s early Asian session.
- Japanese CPI inflation rises above the BoJ target for the first time this year.
- Comments from Fed policymakers have tempered expectations of a rate hike at the October policy meeting.
The USD/JPY pair remains under selling pressure to near 156.25 during the early Asian session on Friday. The Japanese Yen (JPY) strengthens against the US Dollar (USD) following hot Japan’s inflation report. The preliminary reading of the US S&P Global Purchasing Managers Index (PMI) is due later on Friday.
Data released by the Statistics Bureau of Japan on Friday showed that the country’s National Consumer Price Index (CPI) rose 2.1% YoY in September, versus 1.9% prior. Meanwhile, the core CPI, which excludes volatile fresh food but includes fuel costs, came in at 2.1% YoY in September. This figure followed a 1.8% rise in August (revised from 1.7%) and came in line with market expectations.
The CPI that strips out both fresh food and energy, which is closely watched by the BOJ as a better gauge of demand-driven price pressures, climbed 2.4% in September from a year earlier after increasing 2.0% in August (revised from 1.9%).
This report indicated Japanese September inflation exceeded the Bank of Japan (BoJ) target level for the first time in nine months, supporting the case for a near-term interest rate hike and lifting the JPY.
On the US front, remarks from Federal Reserve (Fed) officials signaled little urgency for further policy tightening. Last week, Fed Chair Kevin Warsh expressed optimism about US economic strength but gave no indication of whether or when more hikes would be needed. Traders see a 92.8% chance of a Fed rate hike at the October 27-28 policy meeting, according to the CME FedWatch Tool.
BoJ seen on hold in October as Standard Chartered flags hawkish tone and JPY risks
Analysts at Standard Chartered expect the Bank of Japan to stay put at its late-October meeting, saying, “We expect the Bank of Japan (BoJ) to keep the policy rate unchanged at 1.25% at its 29-30 October meeting, following September’s 25bps hike.” However, they add that “we expect policy makers to maintain a clearly hawkish tone,” with the market discussion now evolving: “As a result, the debate is increasingly shifting from whether the BoJ will hike again to when the next hike will occur.”
Standard Chartered notes that “while December is now a live meeting, January 2027 remains our base case for the next hike,” underscoring expectations for a very gradual tightening path. At the same time, the bank argues that “the BoJ has an incentive to continue policy normalisation to support yield differentials and reduce the risk of renewed JPY weakness, particularly if the Fed resumes tightening or maintains a restrictive policy stance for longer than expected.”
Warsh flags investment surge and AI focus but avoids pre-committing on policy
Fed Chair Warsh’s speech scores 5.6/10 on the FXS Speechtracker, modestly softer relative to the historical average of 6.1/10, reflecting a cautious tone despite upbeat comments on structural growth and an investment surge. The remark about being “over-scarred from the global financial crisis” underscores a lingering risk aversion that tempers optimism about output, employment, and inflation, while repeated refusals to prejudge the October and December meetings keep DOLLAR traders focused on data-dependent outcomes rather than explicit guidance. Warsh’s emphasis on AI as a near-term demand-side force and on financial stability risks signals medium-term policy vigilance but offers limited incremental direction for immediate rate expectations.
The FXS Fed Sentiment Index was unchanged, moving 0.00 points to a still-elevated level of 127.51, consistent with firmly hawkish territory despite the speech’s slightly softer score on the FXS Speechtracker. The flat index reading suggests the market saw the remarks as broadly aligned with existing expectations for restrictive policy, with no fresh dovish cues strong enough to shift the overall hawkish bias.
Technical Analysis: USD/JPY remains capped under a dense band of resistance
In the daily chart, USD/JPY extends a corrective phase after recently peaking above 160. The pair now sits beneath a dense band of resistance, with price below the 20-day Bollinger lower band, the middle band and the upper band, while the 100-day simple moving average (SMA) caps the broader trend. The Relative Strength Index (RSI) at 38.20 has slipped below the neutral 50 line, hinting that downside pressure still dominates despite the pair having already unwound part of its overbought condition.
On the topside, initial resistance aligns with the 20-day Bollinger lower band at 156.75, followed by the Bollinger midline at 157.85, which marks the next recovery hurdle. Higher up, the upper Bollinger band at 159.00 and the 100-day SMA at 159.35 form a wider supply cluster that would need to be reclaimed to ease the current bearish bias. With no nearby technical support levels in the dataset below 156.38, any further slide would leave the pair searching for fresh demand zones on the chart.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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