USD/JPY Outlook: Tokyo’s Consumer Inflation Climbs to 42-Yr High

• Core consumer prices in Japan’s capital increased by 4.3% in January. 
• Investors that rising inflation may prompt the BOJ to reduce stimulus soon.
• The IMF suggested that the BOJ allow government bond yields to climb more freely.

Today’s USD/JPY outlook is slightly bearish. Core consumer prices in Japan’s capital, which serve as a leading indicator of national trends, increased 4.3% in January compared to the same month last year. This is the largest yearly increase in 42 years and puts additional pressure on the central bank to gradually reduce economic stimulus.

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The government’s energy subsidies, which will go into effect next month, will probably curb price increases from February. However, the data increases the likelihood that inflation will remain well above the Bank of Japan’s 2% target in the months to come as businesses continue to pass on rising costs to consumers slowly.

The increase in the core consumer price index (CPI) for Tokyo, which includes fuel but excludes fresh food, was higher than the median market expectation of a 4.2% increase and was the fastest since May 1981.

Following the announcement of the data, the yen and yield on the 10-year Japanese government bond (JGB) increased, reflecting market views that rising inflation may prompt the BOJ to reduce stimulus soon.

The data came after the IMF suggested on Thursday that the BOJ allow government bond yields to climb more freely to build the framework for a seamless transition from ultra-loose monetary policy.

Additionally, it occurs before the BOJ’s important leadership transition, which some analysts believe could usher in a new governor more eager to roll back its dramatic monetary stimulus.

USD/JPY key events today

The market will likely consolidate as there won’t be any significant news releases from Japan or the United States.

USD/JPY technical outlook: Tight consolidation at the 30-SMA

The 4-hour chart shows USD/JPY chopping through the 30-SMA with no clear direction. The price is trading below the 30-SMA with the nearest resistance at 130.82 and the nearest support at 129.00. The price is at a pivotal level as the RSI is also trading close to 50.

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If the bears win this battle, the price will retest the 129.00 support. At this point, it will either break below and fall to the next support at 127.75 or bounce higher to retest the 130.82 resistance.

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