BOJ Rate Hike Odds Surge to 84% Amid Japan's Inflation Surprise

The USD/JPY pair traded around 158.85 on Friday, easing after Thursday's rebound off 158.00 and holding modest intraday losses into the European session.

Core consumer inflation accelerated to a six-month high in Japan, with core CPI rising 1.8% year-over-year in July from 1.6% in June. This matched the median forecast and delivered a second consecutive monthly acceleration.

The Bank of Japan's 2% target for core inflation remains elusive, but the central bank is under increasing pressure to tighten monetary policy. The market has repriced the BOJ meeting, with overnight index swaps now pricing an approximately 80% chance of a rate hike at the September 17-18 meeting.

The expected outcome is a move from 1.0% to 1.25%, which would be the central bank's first rate hike in nearly two years. Governor Kazuo Ueda has indicated that authorities could begin normalizing policy at a faster pace, and the Takaichi administration has shown growing signs of supporting earlier action.