Inflation numbers for June will be watched out of Japan on Friday (Thursday, 23:30 GMT) ahead of the Bank of Japan’s policy meeting at the end of July. With progress towards meeting its 2% inflation target having stalled, the central bank might find some relief from an expected upward tick in core CPI. However, any acceleration in price growth is unlikely to be in enough in preventing the BoJ from lowering its inflation outlook when it meets later this month.
After years of ultra-loose and unconventional monetary policy, things were looking up for the Bank of Japan at the beginning of the year when core CPI – its targeted inflation measure – hit a 3-year high of 1% year-on-year in February. However, since then, core CPI, which excludes fresh food prices, has eased to 0.7% y/y, increasing the distance from the BoJ’s goal of 2%. Data due on Friday is expected to show inflation moving higher again, with core CPI edging up to 0.8%.
That trend could continue in the coming months as the recent rally in oil prices should push up fuel costs. (Unlike in most countries, Japan’s core measure of inflation includes energy prices). However, the effects of higher fuel prices are not expected to be large enough to offset broader weakness in Japanese consumer prices. Looking at a more accurate gauge of underlying inflation – the BoJ’s Trimmed Mean CPI has fallen to just 0.5% y/y after rising to 0.8% earlier in the year, suggesting the absence of underlying price pressures.
With a Bank of Japan policy meeting scheduled for July 30-31, there have been numerous reports that the Bank will cut its inflation forecasts in its latest quarterly outlook to be published after the meeting. Indications are that the BoJ will lower its projection for core CPI for the fiscal year 2018 to 1.0% from 1.3% in April’s forecasts. For the fiscal year 2019, the projection of 1.8% may be cut to 1.5%, which would mean the central bank does not expect to meet its 2% target before the fiscal year 2020.
If Friday’s inflation data confirms the muted price outlook in Japan, the yen could face downside pressure in anticipation of a dovish BoJ at the July meeting. Bearish bets against the Japanese currency could lift USD/JPY further beyond the 113 handle after this week breaking above the level for the first time since January. Above 113, the pair could meet some resistance near 113.40 before being able to challenge the December and November tops of 113.74 and 114.72, respectively.
However, a surprisingly strong inflation reading could provide traders with an excuse for profit-taking given the recent sharp gains in USD/JPY. The pair could seek immediate support around 112.60 on any sell-off. A breach of that support could accelerate the decline towards the next key area around the psychological 112 level, while below that mark, the focus would turn to 111.35, a previous support and resistance point.
It should be noted though that in general, risk sentiment remains the strongest driver for the safe-haven yen so unless there is a big beat or miss in the numbers, any reaction to the data will likely be limited.
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