Japanese Yen and Australian Dollar News: Tokyo Core Inflation Drops Below 2%

Tokyo Core Inflation Falls Below BoJ’s 2% Target

On Friday, October 25, Tokyo’s core inflation rate fell from 2.0% in September to 1.8% in October, dropping below the Bank of Japan’s 2% target. The decline influenced the demand for USD/JPY.

The latest inflation figures followed October’s Services PMI, which slid from 53.1 in September to 49.3 in October. Significantly, the services sector contracted for the first time since June 2023.

Softer inflation and a contraction in the services sector, which accounts for over 70% of Japan’s GDP, may temper speculation about a BoJ rate hike in Q4 2024.

In September, Bank of Japan Governor Kazuo Ueda emphasized the importance of services sector inflation, saying,

“October is a month when service price revisions are concentrated in Japan, so we must scrutinize data carefully.”

Softer core inflation and October’s Services PMI could push the USD/JPY toward 152.5.

Japan’s General Election and the Bank of Japan’s Rate Path

Beyond the economic indicators, markets are also eying Sunday’s general election. Increasing uncertainty about the election result could dampen buyer appetite for the Yen. The election result could force the Bank of Japan into a monetary policy-holding pattern if the ruling Liberal Democratic Party coalition loses or ends with a minority coalition government.

Markets expect a Constitutional Democratic Party of Japan (CPDJ) win to drive fiscal spending and pressure the BoJ to delay rate hikes.

Japanese Yen Daily Chart

Later in the Friday session, US economic data may also impact the USD/JPY. Positive Michigan Consumer Sentiment figures could drive the USD/JPY toward the 152.5 level Beyond the headline figure, an upward revision to the Michigan Inflation Expectations Index could also support a USD/JPY move toward the 152.5 level.

Conversely, a softer Michigan Consumer Sentiment Index could pull the USD/JPY toward 150.

China’s Policy and the Aussie Dollar

Turning to the Aussie dollar, the People’s Bank of China (PBoC) policy measures may influence AUD/USD trends. Economists expect the PBoC to maintain the 1-Year Medium Term Lending Facility Rate (MLF) at 2.0%

However, an unexpected cut could increase Aussie dollar demand, potentially pushing the AUD/USD toward $0.67. Conversely, a lack of new stimulus may weigh on market risk sentiment, possibly dragging the AUD/USD below $0.66.

Cheaper lending rates may drive consumer borrowing, potentially fueling private consumption. A pickup in private consumption could bolster China’s economy, potentially driving demand for Aussie goods.

With China accounting for one-third of Australian exports and Australia having a trade-to-GDP ratio above 50%, increased demand from China may signal a pickup in the Aussie economy.

Australian Dollar Daily Chart

Later in the Friday session, finalized Michigan Consumer Sentiment figures could influence US dollar demand.

An upward revision to the Sentiment Index may temper bets on a December Fed rate cut, potentially pulling the AUD/USD below $0.66. Conversely, a downward revision could signal a softer US inflation outlook.

Expectations of weaker consumption and subdued inflation could fuel speculation about a December Fed rate cut. A more dovish Fed rate path could see the AUD/USD target the $0.67 level.

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