Japan Annual Inflation Rate Holds Steady at 3.3% to Further Pressure the BoJ

Highlights

• Inflation figures from Japan tested the Bank of Japan’s theory of ultra-loose this morning.
• The national annual inflation rate held steady at 3.3% in July, while core inflation softened from 3.3% to 3.1%.
• Yen interventions, PBoC policy chatter, and FOMC member commentary need monitoring today.

Overview

It was a relatively busy morning on the Asian economic calendar. While there were no economic indicators from China to spook investors, inflation numbers from Japan drew interest. Hotter-than-expected numbers would retest the Bank of Japan’s ultra-loose monetary policy stance.

In July, the national annual inflation rate held steady at 3.3% versus a forecasted softening to 2.5%. However, the national core inflation rate eased from 3.3% to 3.1%. Economists forecast a core inflation rate of 3.1%.

While the softer core inflation rate will provide some comfort, the Bank of Japan has to consider sticky inflation. In July, Japan’s government released inflation and growth forecasts, which supported a Bank of Japan move away from ultra-loose. While projecting growth of 1.5%, the government forecasted inflation at 2.6% this fiscal year.

Considering the latest inflation numbers, the Bank of Japan may need to deliver more than tweaking the Yield Curve Control policy.

USD/JPY Reaction to the Japan Inflation Figures

Before the inflation numbers, the USD/JPY rose to an early high of 145.867 before falling to a pre-stat low of 145.573.

However, in response to the inflation figures, the USD/JPY rose to a post-stat high of 145.730 before falling to a low of 145.597.

This morning, the USD/JPY was down 0.14% to 145.632.

Friday Curveballs

There are no economic indicators from China or the US to influence the markets today. However, investors should monitor central bank commentary and activity.

Hopes for more stimulus from Beijing will likely linger, with announcements from Beijing likely to move the dial. However, investors should also monitor FOMC member chatter throughout the session.

After the latest US retail sales figures and FOMC meeting minutes, hawkish chatter would fuel bets on a September Fed rate hike. However, Yen intervention could be another curveball considering the latest inflation numbers.