Japanese yen weakens after inflation data

The Japanese yen weakened to around 145.5 per dollar on Friday, its lowest level in three weeks, as traders digested the latest inflation figures.

Japan’s core CPI rose 3.1% year-on-year in July 2025, easing slightly from June’s 3.3% but still above the consensus forecast of 3%. The reading remains well above the Bank of Japan’s 2% target, reinforcing expectations that the central bank could shift away from its ultra-loose stance sooner rather than later.

Analysts expect core inflation to stay above 3% for much of the year, supported by higher service costs and wage growth, bolstering bets that the BOJ could raise rates as early as October.

At its July meeting, the BOJ raised its inflation outlook and signaled greater openness to tightening by year-end, though divisions remain within the policy board. Some officials argue that robust wage gains and sticky services inflation justify a gradual move away from negative rates, while Governor Kazuo Ueda continues to emphasize caution, noting that “underlying inflation” has yet to show a stable and sustained alignment with the 2% goal.

Market watchers suggest that any October move would likely be modest, with further steps in 2026 depending on wage negotiations and consumer spending trends.

Externally, the yen also faced downward pressure from a stronger US dollar, as investors positioned ahead of Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole symposium. Markets are looking for clarity on whether Powell will push back against expectations for a near-term rate cut, with futures currently pricing in a high probability of easing in September.

The widening US-Japan yield gap has kept the yen under strain, and unless the BOJ signals a firmer policy stance, the currency may remain vulnerable to renewed depreciation.