The Japanese yen strengthened to around 143.6 per dollar on Friday and was set to advance more than 1% for the week, underpinned by hotter-than-anticipated inflation data that surprised markets and boosted expectations of a shift in monetary policy.
Japanese yen gains on hot inflation data
Japan’s core inflation rate accelerated more than expected to 3.5%, marking the highest level in over two years and signaling that underlying price pressures are becoming more entrenched across the economy. This development reinforces market expectations that the Bank of Japan (BoJ) will maintain or even intensify its tightening stance, moving away from its long-standing ultra-loose monetary policy to combat persistent inflation.
Meanwhile, the headline inflation rate held steady at 3.6%, reflecting a balanced mix of rising costs in energy and food alongside some stabilization in other sectors. The sustained inflation backdrop contrasts sharply with the BoJ’s previous challenges in meeting its 2% target and has triggered a reassessment of the timing and scale of interest rate adjustments among investors.
The yen’s gains were also supported by a broader weakening of the US dollar, which remained under pressure due to ongoing concerns about the US fiscal outlook, including debates over budget deficits and national debt levels. This environment has encouraged traders to move away from the greenback toward currencies perceived as safer or more fundamentally supported, like the yen.
Speculation regarding currency intervention
Elsewhere, Japanese Finance Minister Katsunobu Kato addressed speculation regarding currency intervention, stating earlier this week that he did not discuss exchange rate levels with US Treasury Secretary Scott Bessent during the recent G7 meetings in Canada. His remarks appeared aimed at downplaying rumors of coordinated efforts to influence the yen’s value, signaling that Japan is currently relying on market forces rather than direct intervention to manage currency volatility.
Overall, the yen’s recent strength reflects a combination of solid domestic inflation data, expectations of tighter monetary policy, and external factors weighing on the dollar. Market participants will be closely watching upcoming BoJ policy meetings and US fiscal developments to gauge the future trajectory of the yen amid a complex global economic backdrop.
