Yen extends recovery on Japanese interest rate outlook

The Japanese yen rose in Asian trading on Friday against a basket of major and secondary currencies, extending its recovery for a second consecutive session from a two-week low versus the US dollar, after data showed Tokyo core inflation rising at a pace above market expectations.

The currency was also supported by more hawkish remarks from Kazuo Ueda, Governor of the Bank of Japan, which opened the door for further monetary tightening in the country, as markets await more evidence on the timing of potential Japanese interest rate hikes.

Price Overview

• Japanese yen exchange rate today: the US dollar fell against the yen by 0.35% to 155.54 yen, from an opening level of 156.09 yen, recording a session high at 156.22 yen.

• The yen closed Thursday higher by 0.2% against the dollar, marking its first gain in the last three sessions, as part of a recovery from a two-week low at 156.82 yen.

Tokyo core inflation

Data released in Japan today showed that Tokyo’s core consumer price index rose 1.8% year-on-year in February, above market expectations of 1.7%, after recording a 2.0% increase in January.

Higher-than-expected price readings in Japan are likely to intensify inflationary pressure on monetary policymakers at the central bank, reinforcing the likelihood of additional Japanese interest rate hikes this year.

Kazuo Ueda

In an interview with the Yomiuri newspaper, Kazuo Ueda said that the bank’s baseline stance is to continue raising interest rates if the probability of achieving its economic and inflation forecasts increases.

Ueda added that the central bank will carefully review incoming data during the upcoming monetary policy meetings in March and April before deciding on any further rate increases.

He also pointed out that the outcome of this year’s annual wage negotiations could be a decisive factor. If wage gains come in stronger than expected and encourage companies to raise prices more quickly, the 2% inflation target could be achieved sooner than anticipated.

Ueda explained that core inflation has not yet sustainably reached the 2% target, but the bank will steer policy to ensure the goal is met without excessive overshooting, emphasizing that the bank is not “behind the curve” in addressing inflation risks.

Japanese interest rates

• Following the above data and comments, markets are pricing the probability of a quarter-point rate hike at the March meeting at around 15%.

• Pricing for a quarter-point rate hike at the April meeting stands near 45%.

• In the latest Reuters survey, the Bank of Japan is expected to raise interest rates to 1% by September.

• To reprice these expectations, investors are awaiting المزيد of data on inflation, unemployment, and wage growth in Japan.