Just when it seemed that the concerns surrounding the yen might be subsiding, new data from Japan indicates a rise in core inflation.
Figures released earlier today showed that Japan’s core inflation, which excludes fresh food prices, increased by 3% year-on-year in February. This is a decrease from January’s 3.2% but exceeds the expected rate of 2.9%. Meanwhile, the overall consumer price index decreased to 3.7% from 4%.
Both measures are still significantly above the Bank of Japan’s target inflation rate of 2%, reinforcing the central bank chief’s affirmation of success in overcoming years of deflation. Interestingly, Japan’s overall inflation has consistently outpaced that of the U.S. since November, now running nearly 100 basis points higher.
The persistent inflation, combined with wage increases from the shunto wage talks, has intensified discussions about potential interest rate hikes by the Bank of Japan. This raises the possibility of a yen appreciation, which historically has had destabilizing effects on risk assets, such as cryptocurrencies.
At the time of writing, the dollar-yen (USD/JPY) exchange rate was at 149.22, demonstrating a rebound of nearly 300 pips—a clear sign of renewed yen weakness since March 11, based on TradingView data.
Nonetheless, the tightening or decline of the U.S.-Japan 10-year bond yield spread is indicative of strengthening yen. Yields in Japan have risen throughout the curve, providing positive signals for the yen. As of this moment, Japan’s 10-year bond yield is above 1.5%, and the 30-year yield exceeds 2.5%, both reaching levels not seen in decades.
The resurgence of the yen could lead to a degree of risk aversion similar to what was observed last August.