Japanese Yen Weakens as Inflation Eases

The Japanese yen slipped past 155 per dollar on Friday, falling for the third consecutive session as both headline and core inflation rates slowed in January amid government measures to ease cost-of-living pressures. Headline inflation dropped to 1.5% from 2.1%, the lowest since March 2022, while core inflation matched the Bank of Japan’s 2% target, marking the slowest pace in two years. The data gives the central bank more leeway before considering interest rate hikes, particularly amid a lackluster economic rebound last quarter. Meanwhile, Prime Minister Sanae Takaichi is set to open the new parliamentary session with plans to boost strategic investment, pursue “active but responsible” fiscal policies, and advance assertive diplomacy. The yen is on track to decline about 1.6% this week, retracing roughly half of the previous week’s gains following Takaichi’s landslide election victory.

The Japanese yen depreciated past 155 per dollar on Thursday, extending losses from the previous session when it marked its sharpest one-day decline this month, as the dollar strengthened on solid US economic data and surprise hawkish signals from the Fed. Minutes from the Fed’s latest meeting showed several participants favored language that would have explicitly left open the option of raising the federal funds rate should inflation remain above target. On the domestic front, data indicated Japan’s machinery orders rebounded strongly in December after a November slump, supported by one-off large bookings from refineries and nuclear fuel producers. Investors also continued to evaluate Japan’s economic trajectory, with PM Takaichi expected to prioritize faster budget deliberations. At the same time, markets are increasingly pricing in a potential April rate hike by the BOJ, as additional data due before then could provide policymakers with sufficient justification to tighten policy.

The Japanese yen fell to around 153.5 per dollar on Wednesday, giving back gains from the previous session despite strong trade data. Exports surged in January at the fastest pace in over three years, supported by robust demand for AI-related chips. The data reinforced expectations that the Bank of Japan may continue its path toward policy normalization. Still, the recent weak Q4 GDP, which fell short of market forecasts and narrowly missed a technical recession, has tempered optimism. Traders expect that Prime Minister Sanae Takaichi’s policies could support economic growth, indirectly reinforcing the BoJ’s gradual normalization strategy. Markets are pricing in a potential interest rate hike by the BoJ in April. Meanwhile, the IMF reiterated that it does not target the yen’s level, noting that the currency’s value is determined by market forces.