Japan's economy minister offers sanguine view on inflation

Japan's Economy Minister Minoru Kiuchi reported on Tuesday that the effects of increased goods costs have not yet been fully passed through to consumers. Both the government and the Bank of Japan (BoJ) are working together to reach a sustainable 2% inflation target. June's overall Consumer Price Index (CPI) shows prices have risen moderately year-on-year.

The government and the BoJ foresee consumer inflation accelerating in the second half of the year, only to slow down later. The BoJ has shared its forecast with the government regarding this potential cost pass-through, which is expected to occur from summer through autumn. The BoJ remains vigilant about the likelihood of costs being passed through to consumers.

The minister also emphasized the importance of the BoJ communicating effectively with the government to guide policy. While the exact level of the Japanese Yen was not specified, the minister noted that the Yen's value is being closely monitored for its potential impact on the economy and prices. At the time of the report, USD/JPY was near its intraday high of around 157.65.

The Japanese Yen is one of the world's most traded currencies, with its value influenced by factors such as the Bank of Japan's policy, the yield differential between Japanese and US bonds, and market risk sentiment. The Bank of Japan has the mandate to control the currency, and its moves have a significant impact on the Yen. The BoJ has intervened in currency markets in the past, usually to lower the Yen's value, but it rarely does so due to concerns about its trading partners.

The Bank of Japan's monetary policy has been ultra-loose from 2013 to 2024, causing the Yen to depreciate against its main currency peers due to a widening policy divergence with other central banks. Recently, as the Bank of Japan gradually unwinds its ultra-loose policy and other major central banks cut interest rates, the differential between US and Japanese bonds has narrowed, favoring the US Dollar against the Japanese Yen.

The Japanese Yen is often considered a safe-haven investment, meaning its value typically increases during market stress due to perceived reliability and stability. This could strengthen the Yen's value during turbulent times. The Japanese Yen was seen as a safe-haven investment during times of uncertainty.