Japan's consumer inflation rate in January slowed to an annual rate of 2.2% from 2.6% year-on-year. The data was slightly above the expected 2.1%, providing temporary support for the Japanese yen, which rose by 0.4% after the release, pulling the dollar back to 150.1 against the yen.
FxPro senior analyst Alex Kuptsikevich noted: The year-on-year increase in prices excluding food slowed to 2.0%, the lowest level since March 2022, and fell back to the Bank of Japan's target level. However, the less volatile index excluding food and energy slowed from 3.7% to 3.5% in January. Despite this, it remains the highest level since the early 1980s, thus warranting the attention of regulators.
Inflation data also helped push Japan's 2-year government bond yields to their highest level since 2011.
The latest inflation data has heightened expectations that a change in monetary policy may occur soon. Observers predict that the zero-interest-rate policy could be abolished as early as April this year. The strengthened expectations support the yen by narrowing the yield gap between yen-denominated debt and other reserve currencies.
Meanwhile, Japan's passive actions in recent years have been surprising, so skepticism about its real capability is logical. This is particularly evident when the Federal Reserve, the European Central Bank, and the Bank of England choose to start cutting interest rates. Concerns that the yield gap may narrow too quickly could lead the Bank of Japan to opt for inaction once again.
