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CFDs are complex financial instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. CFDs are complex financial instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

Market update: hiking rates into economic weakness as inflation path wavers

Japan's headline inflation dropped to 2.5% in April, with the core measure also showing declines. This comes as the Bank of Japan faces the challenge of hiking rates amidst weak economic data and inconsistent inflation patterns.

Source: Getty Images

Japanese CPI eased in April as record wage increases fail to show up in prices

Headline inflation in Japan dropped to 2.5% when compared to April last year, down from 2.7% in March. Additionally, the core measure (excluding fresh food) dropped from 2.6% to 2.2% as expected. The reading that strips out volatile items like fresh food and energy also noted a decline from 2.9% to 2.4% as a lack of consumer activity appears to be taking its toll on the “virtuous relationship” between wages and prices in Japan.

Source: DailyFX

Ahead of Japan’s first rate hike since 2007, the Bank of Japan (BoJ) communicated preconditions for a movement in the interest rate which depended on the board attaining the necessary confidence that inflation would remain above 2% in a stable and sustained manner, often referring to a virtuous relationship between wages and prices. The Bank also specified that demand driven inflation needs to be observed instead of ‘cost push inflation’ which had been brought about by supply disruptions leading to surging oil prices.

Since then, Japanese wages rose at the highest annual rate in the past 33 years in response to higher prices but inflation has failed to advance in a consistent manner. Instead, inflation data has been inconsistent and the higher cost of labour has not yet passed through to higher prices for consumers which ought to stoke inflation higher over time.

The BoJ’s challenge: hiking into weakness amid uncertain inflation path

Japanese GDP contracted 0.5% in the first quarter to follow up a flat reading in Q4 (0%) of last year to narrowly avoid a technical recession. One major concern observed in the weak data has been local consumer spending and general consumption.

Economic activity is relied upon to stimulate growth and pave the way towards another rate hike but if consumers are retreating it becomes very difficult to tighten financial conditions. Therefore, it may be a while longer before the BoJ attain the necessary confidence to hike interest rates again with the market pricing in a potential 10 basis point hike in July with a total of 25 basis points for the year.

In the meantime, sellers of Japanese Government bonds (JGBs) appear to be waning, allowing the 10-year yield to breach 1% recently. The rise in yields suggests an acceptance in the market that rates and yields are on an upward trajectory and that the BoJ may be able to reduce future bond purchases. Higher yields have done little to strengthen the yen though, as US yields have also been on the up since a return to the ‘higher for longer’ narrative from prominent Fed officials in recent days alongside the hawkish FOMC minutes.

Japanese government bond yields (10-year)

Source: TradingView

USD/JPY edges higher once more but moves remain measured

Less than one month after it was suspected that Japanese officials intervened in the FX market, USD/JPY now trades closer to the 160 marker that set the process into action. However, the grind higher has been gradual, not exhibiting the same volatility that prompted officials into action.

In a quieter week for top tier US data, it was largely expected that the dollar would shine – accommodating a market preference for higher yielding currencies during times of lower observed volatility.

The pair trades above 157.00 after bouncing sharply higher off the 50-day simple moving average (SMA) back in the early stages of May, followed by a rise above 155.00. The problem is likely to persist as long as the interest rate differential between the two nations remains wide. The carry trade remains strong.

USD/JPY daily chart

Source: TradingView

This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.


This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.

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