JPY Inflation Rises Again

The Japanese Yen has been stronger across the board on Tuesday following the latest inflation data overnight. Tokyo core CPI was seen rising to 2.5% last month form the prior month’s 1.8%, which itself was revised higher. The data shows that inflation is moving sustainably above the bank’s 2% target, strengthening expectations that the bank will soon be forced to normalise policy.

Ueda on Inflation

Speaking recently, BOJ chief Ueda told reporters that the bank didn’t think they were quite there on inflation. However, this latest data suggests the strong risk that we hear a shift in the bank’s view very soon. Ueda explained last week that the BOJ needed to confirm a wage-inflation cycle in existence in order to assess the likelihood of inflation becoming entrenched above 2%.

Wage Negotiations in Focus

Key to determining that will be the Shunto wage negotiations which are currently underway. Given the uptick in inflation, the likelihood is that companies agree to hefty wage increases which should in turn essentially greenlight the BOJ to raise rates. The BOJ has said previously that the March meeting will be the time when it reviews policy and decides whether to take any action in normalising policy. Given today’s data, the risks appear to be on the hawkish side meaning that JPY is vulnerable to a sharp move higher into the upcoming BOJ meeting this month. In this scenario, we can also expect a sharp correction lower in the Nikkei.

Technical Views

NIKKEI

The rally in the index has seen price breaking above the bull channel, now up more than 20% on the year. However, with bearish divergence in momentum studies, risks of a correction are growing. Should we turn down from here, bulls will need to defend the 37067 level to keep the focus on further upside. Below there, 33970 and the bull channel lows will be next support to note.