Japanese Yen gathers strength as CPI inflation exceeds target, backing BoJ rate hikes

On Friday, the Japanese Yen (JPY) showed signs of strengthening as Japan's inflation figures exceeded the Bank of Japan's target level. The preliminary reading for the National Consumer Price Index (CPI) rose 2.1% year-over-year in September, surpassing the previous 1.9%. The core CPI, which excludes volatile food and fuel prices, also increased by 2.1% year-over-year.

These figures indicate that Japan's inflation has exceeded the BoJ's target for the first time in nine months, supporting the notion of a potential near-term interest rate hike. In contrast, the US Federal Reserve (Fed) officials' remarks signaled a lack of urgency for further policy tightening. Fed Chair Kevin Warsh expressed optimism about US economic strength but provided no indication of when additional rate hikes might be required.

According to the CME FedWatch Tool, there is a 92.8% probability of a Fed rate hike at the October 27-28 policy meeting. Analysts at Standard Chartered predict the Bank of Japan to maintain its policy rate at 1.25% during its late-October meeting, following a 25-basis-point hike in September. However, they expect the BoJ to retain a hawkish tone, with the discussion now focusing on when the next rate hike will occur.

The debate is shifting from whether the BoJ will hike again to determining the timing of the next hike. Standard Chartered suggests that while December is a potential meeting, January 2027 remains the base case for the next hike. The Bank of Japan aims to support yield differentials and reduce the risk of a Yen weakness if the Fed resumes tightening or maintains a restrictive policy for an extended period.

Despite Warsh's speech receiving a modest score of 5.6/10 on the FXS Speechtracker, it remained hawkish relative to the historical average of 6.1/10. The speech's emphasis on AI as a near-term demand-side force and on financial stability risks suggests medium-term policy vigilance but does not provide significant guidance for immediate rate expectations.

The USD/JPY pair has entered a corrective phase, trading below a dense band of resistance near 156.75 and the 100-day simple moving average (SMA) at 159.35. The RSI at 38.20 has fallen below the neutral 50 line, indicating that downside pressure still prevails, despite the pair already unwinding some of its overbought condition.