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Fresh inflation data from Japan is very encouraging for Japanese policymakers. Japan’s PM, Shinzo Abe, vowed to fight falling prices, and it seems he is gaining some victories.  

Despite these numbers, the yen is strengthening. The weakness of the US dollar is just overwhelming.

Here are the numbers:

Figure / Actual / Consensus / Previous

National Consumer Price Index (YoY) (Jul)  0.2% 0.1% -0.3%
National CPI Ex Food, Energy (YoY) (Jul)  -0.2% -0.3% -0.4%
National CPI Ex-Fresh Food (YoY) (Jul)  0.4% 0.3% 0.0%
Tokyo Consumer Price Index (YoY) (Jul)  0.4% 0.2% 0.0%
Tokyo CPI ex Food, Energy (YoY) (Jul)  -0.4% -0.4% -0.4%
Tokyo CPI ex Fresh Food (YoY) (Jul)  0.3% 0.3% 0.2%

Not only were expectations higher than in the previous month, but in some figures, price rises exceeded expectations. Consumer prices rose the most since June 2008 – before the financial crisis.

Why is Japan fighting deflation? When prices fall, people are less encouraged to buy, and this reduces economic activity, reduces prices, reduces consumption, etc. To break this vicious cycle is quite hard.

USD/JPY Reaction

In normal times, a rise in inflation would imply tighter monetary policy and therefore a stronger local currency. In not so normal times, after the financial crisis of 2008, rising inflation doesn’t imply tighter monetary policy and would mean a weaker currency.

We are now seeing a stronger yen: USD/JPY stopped dancing with 100 and fell below 99 to 98.67 at the time of writing. Are there any thoughts of a rate hike in Japan due to rising inflation? Not a chance. A rate hike is years away.

This is probably the weakness of the greenback across the board. Stronger currencies are moving higher against the dollar, and so are weaker ones. These deflation numbers cannot stop the yen at the moment, but they will probably weigh on it later on.

For more, see the USD/JPY forecast.