BOJ Hike Bets Fuel JPY Weakness as Inflation Pressures Mount

The latest Consumer Price Index (CPI) report from Japan has strengthened the case for another Bank of Japan rate hike in September. Despite this, the Japanese yen remains weak across the FX majors following the release of the data.

The CPI report showed core inflation excluding fresh food rising 1.8% year-on-year in July, up from 1.6% in June and in line with expectations. Underlying CPI excluding both fresh food and energy accelerated to 1.9%, moving closer to the BOJ's 2% target.

The breakdown of the data shows goods prices are still doing much of the heavy lifting, rising 2.7%. This is due to imported costs, the weak yen, and higher commodity prices feeding through to consumers. Services inflation also edged higher to 1.2%, which is more important for the BOJ as it points to firms gradually passing on higher labour costs to consumers.

A September hike to 1.25% is increasingly becoming the base case, but the bigger question for yen traders is whether persistent inflation and yen weakness will force the BOJ to accelerate its tightening cycle beyond September.