Japanese Yen Weakens as Tokyo Meets Inflation Target

The Japanese Yen continues to weaken against the US Dollar as Tokyo's inflation rate reaches 2% in August, meeting the Bank of Japan's target. The USD/JPY pair has risen for a fifth consecutive session, reaching a high of 160.00. This follows Tokyo's labour data release, which showed unemployment falling to 2.4%, its lowest level in a year.

The inflation rate excluding food and energy reached 2% in August, surpassing the consensus estimate of 1.7%. The Bank of Japan had been waiting for this figure to reach 2% before making any policy decisions. With Tokyo's data meeting expectations, the market is now looking towards the Federal Reserve's decision on September 16.

The Federal Reserve chair warned that the committee still has work ahead of it while it lacks confidence that underlying inflation is returning to 2%. This sentiment has been reflected in futures markets, with a quarter-point increase on September 16 pricing above 55%, and at least one more increase near 85% by October 28.

However, the Bank of Japan's decision to raise interest rates would leave a significant gap between Japanese and US bond yields. A move to 1.25% against the Federal Reserve's range of 3.75% to 4.00% would maintain the same gap of roughly 250 basis points that exists today.