USD/JPY price reaches 16-week high as Japan inflation pressures mounts
Bank of Japan weighs rate hike options amidst yen's decline and rising import costs
The USD/JPY has surged past 156.00, after a breakout from nearly three weeks of consolidation drives the pair to a 16-week high. This milestone reflects the yen’s ongoing decline which is now in its fourth consecutive day of weakness against the dollar.
Market participants can see the implications of intensifying inflationary pressures on the yen and in Japan's economy, which could prompt a strategic response from the Bank of Japan. Japan’s Producer Price Index (PPI) rose to 3.4% year-on-year in October, even higher than a reduced forecast of 2.9% from September’s 3.1%. This uptick in wholesale inflation, the fastest pace since August 2023, comes as a weakened yen pushes import costs higher for businesses across sectors. As a result, essential goods like rice, nonferrous metals, food, and oil have become more expensive. So, for companies, the story here is challenging, they’re absorbing higher raw material costs, and the dollar’s 4.3% climb against the yen between October and November is only adding fuel to the fire.
Mixed economic outlook on BoJ rate path
The Bank of Japan is now facing a tightening conundrum. While recent adjustments saw interest rates lifted from negative to 0.25% in July, Governor Kazuo Ueda has hinted at further rate hikes if inflation pressures shift more toward demand-driven factors and wage increases rather than external costs alone. This outlook means a potential rate hike by December is back on the table, particularly as wage hikes gain traction, thus strengthening the central bank’s inflation goals.
Most economists are betting against another BoJ rate increase this year, while some still expect rates to rise by March. The yen’s persistent softness and robust USD/JPY performance will keep Japan’s inflationary risks under scrutiny, thus exerting pressure on the Bank of Japan to balance its moves carefully.
Japan’s latest M2 Money Stock data for October proved to be weaker than anticipated, adding to the yen’s subdued performance. The currency pair remains within a three-week range, held between 151.70 and 155.00
