Japan: BoJ inflation focus and rate risks – Rabobank

Rabobank's Senior FX Strategist, Jane Foley, discusses Japanese inflation and Bank of Japan policy in a recent report. The analysis acknowledges high oil prices and supply risks, yet emphasizes the BoJ's primary concern over core inflation and wage-driven pressures following decades of deflation. The BoJ has warned that core CPI could potentially surpass 2%, potentially prompting a rate increase around September or October.

While reduced labor market tightness lowers the likelihood of secondary price effects, soaring oil prices might push several G10 central banks toward a more aggressive stance this year. Rising oil prices, coupled with the Strait of Hormuz's partial closure, could extend inflationary pressures to the US Federal Reserve, possibly bolstering the USD as a safer alternative.

Such a shift could be disadvantageous for Japan's Ministry of Finance (MoF). However, the BoJ remains centered on core inflation and strives to foster a shift in corporate psychology from cost-cutting to wage increases. The central bank has pointed out the danger of core CPI deviating above the 2% inflation target in its latest economic activity and prices outlook, suggesting a possible BoJ rate hike in September, though the market is leaning towards October.

Robust Japanese economic growth and heightened growth expectations could alleviate fiscal concerns. At present, the government will likely need to exert more effort to address fiscal discipline concerns and allay investor nerves, calming the Japanese Yen. With GBP/USD near the 1.3500 level, the day's trading saw some pressure from heightened US Dollar demand as a safe-haven amid surging oil prices and inflation concerns.

The focus remains on Middle East headlines, with US CPI data looming as the primary risk factor this week. EUR/USD remains sluggish, trading slightly below 1.1550. Traders are cautious, awaiting further developments on the Middle East situation and the upcoming US inflation figures. Gold has retreated from its June 5 high of $4,435, slipping below $4,400 in European trading.

Oil price increases, driven by the US-Iran standoff over reopening the Strait of Hormuz, reignited inflation worries, supporting the US Dollar and pressuring gold. Bitcoin remains cautiously optimistic, hovering near $64,000, awaiting a breakout signal.