Tokyo’s core inflation rate excluding fresh food and energy rose to 1.9% year on year in June, up from 1.6% previously. The move points to firmer underlying price pressures in the capital.
The data refer to Tokyo CPI on an ex food, energy basis, a measure watched as a gauge of trend inflation. June’s reading marks a 0.3 percentage point acceleration from the prior figure.
Implications For Monetary Policy And Currency Markets
The latest inflation data from Tokyo shows core inflation hitting 1.9%, putting it right on the doorstep of the Bank of Japan’s 2% target. This is the firmest evidence we have that inflation is becoming embedded, forcing the central bank’s hand. We believe this dramatically increases the probability of a policy shift, such as a rate hike or further bond-buying taper, at the July or August BoJ meetings.
For us, the most immediate trade is in the currency markets. The Japanese yen should see significant strength as rate hike expectations are priced in. With the USD/JPY recently touching a multi-decade high above 165, we see a strong case for it to pull back toward the 160 level in the coming weeks, a move of over 3%.
Impact On Bonds And Equities
This inflation reading also directly impacts the bond market. We’ve already seen the 10-year Japanese Government Bond yield climb to 1.15% this week in anticipation of tighter policy. We should now expect this upward pressure on yields to continue, making positions that bet on falling bond prices, such as shorting JGB futures, more attractive.
Finally, we need to be cautious on Japanese equities. A stronger yen hurts the profitability of Japan’s crucial export sector, and higher interest rates act as a headwind for the broader stock market. The Nikkei 225 has been trading near 41,000, but we should consider buying put options as a hedge against a potential market pullback, recalling the volatility that occurred when the BoJ ended negative rates in March 2024.
