Key Points:
The Japanese yen remained at over one-week lows around 157.2 per dollar, despite hotter-than-expected domestic producer inflation figures.
Picture: JPY losing strength against USD, as observed on the VT Markets app.
Data revealed that producer prices in Japan jumped 2.4% year-on-year in May 2024, accelerating from an upwardly revised 1.1% gain in April and marking the highest reading since August of the previous year. This latest figure surpassed market expectations for a 2% rise, raising concerns that it might lead to a higher level of consumer inflation.
The market is now focusing on the upcoming Bank of Japan (BOJ) policy decision on Friday, with particular interest in whether the central bank will reduce its monthly bond purchases. Last week, BOJ Governor Kazuo Ueda reaffirmed that the central bank will gradually scale back its massive balance sheet, although the timing remains uncertain.
Related articles: What are government bonds?
How will this hit the market
The unexpected surge in producer prices indicates potential upward trajectory on consumer inflation in Japan. Historically, higher producer prices can eventually translate into higher consumer prices, affecting the purchasing power and overall economic stability. For instance, during the early 1990s, Japan experienced a period of high inflation that significantly impacted consumer prices and economic policies.
The current situation mirrors the challenges faced by central banks globally, balancing inflation control with economic support. If the BOJ decides to reduce its bond purchases, it could signal a shift towards tightening monetary policy, which might strengthen the Japanese yen in the medium term. However, the uncertainty around the timing of such moves leaves the market in a state of speculation.
What traders should look out for
The Japanese yen is likely to remain under pressure in the short term due to the uncertainty surrounding the policy decision by the BOJ and the recent rise in producer prices. The BOJ meeting should be monitored closely for any indications of policy changes. If the BOJ starts to scale back its bond purchases and the inflation trend continues, a gradual strengthening of the Japanese yen is expected to show.
