The Japanese yen was flat on Thursday after rising sharply in overnight trade after a mixed reading on U.S. consumer inflation data. The U.S. consumer price index (CPI) rose 0.4% in April, slightly below expectations, but the core CPI, which excludes food and energy, jumped 0.9%, the largest increase since 1982. The data showed that inflation pressures are building up in the U.S. economy as it recovers from the pandemic, raising the possibility of a tighter monetary policy by the Federal Reserve.
The yen, which is often seen as a safe-haven currency in times of uncertainty, gained against the dollar and other major currencies as the inflation data sparked a sell-off in U.S. Treasury bonds, pushing up their yields. The higher yields make the dollar more attractive to investors, but also increase the risk of a sudden reversal if the Fed signals a shift in its stance.
The yen was trading at 108.75 per dollar as of 10:00 GMT on Thursday, little changed from its level before the inflation data was released. It had risen to as high as 108.56 per dollar earlier in the session, its strongest level since April 27.
The yen’s performance was also influenced by domestic factors, such as the state of emergency declared in several prefectures due to a surge in coronavirus cases, and the Bank of Japan’s (BOJ) monetary policy meeting on Friday. The BOJ is widely expected to keep its ultra-loose policy unchanged, but may revise down its economic outlook and extend its pandemic-relief measures.
The yen has been under pressure this year as Japan’s economy has lagged behind other major countries in terms of vaccination and recovery. The yen has lost about 5% against the dollar since the start of the year, and about 3% against a basket of six major currencies.
However, some analysts believe that the yen may find some support in the coming months, as the global economic recovery becomes more balanced and the U.S. fiscal stimulus fades. They also expect that the BOJ will maintain its yield curve control policy, which caps the 10-year Japanese government bond yield at around 0%, limiting the divergence with U.S. yields.
The Japanese yen is one of the most traded currencies in the world, and its exchange rate affects Japan’s export-oriented economy and its asset markets. The yen’s movements are also influenced by various factors, such as risk sentiment, interest rate differentials, trade flows, and geopolitical events.
One of the key indicators to watch for the yen is the inflation rate in Japan, which has been persistently low for decades, despite the BOJ’s massive monetary stimulus. The inflation rate in Japan between 1956 and 2021 was 494.88%, which translates into a total increase of ¥494.88. This means that 100 yen in 1956 are equivalent to 594.88 yen in 2021. The average annual inflation rate between these periods was 2.78%. In contrast, the inflation rate in the U.S. between 1956 and 2021 was 887.51%, which translates into a total increase of $887.51. This means that $100 in 1956 are equivalent to $987.51 in 2021. The average annual inflation rate between these periods was 3.46%.
The low inflation rate in Japan reflects the structural challenges that the country faces, such as an aging population, a declining labor force, a high public debt, and a lack of productivity growth. The BOJ has been trying to achieve its 2% inflation target since 2013, but has failed to do so despite adopting various unconventional measures, such as negative interest rates, asset purchases, and forward guidance.
The BOJ’s governor Haruhiko Kuroda has repeatedly said that he will not hesitate to take additional easing steps if necessary to boost inflation and growth. However, he has also acknowledged that there are limits to what monetary policy can do, and that fiscal and structural reforms are needed to enhance Japan’s growth potential.
The outlook for the Japanese yen remains uncertain amid the global and domestic developments that affect its demand and supply. The yen may face further downside pressure if the U.S. economy continues to outperform Japan’s and if the Fed moves closer to tapering its asset purchases or raising its interest rates.
