JPY: Little tailwind from inflation – Commerzbank

BoJ's interventions in recent days can best be described as ‘leaning against the wind’. But, at the moment, the wind continues to blow in the direction of a weaker Japanese Yen (JPY), Commerzbank’s FX analyst Volkmar Baur notes.

Inflation to fade away if the JPY stabilizes

“In addition to this week's disappointing services index, which showed a contraction in activity in May, the foreign trade figures were also unconvincing. One of the reasons for this was weaker imports, which does not bode well for a robust domestic economy. And last night's inflation was unchanged at 2.8% y/y, and actually rose slightly from 2.1% to 2.2% when fresh food and energy are excluded.”

“And momentum also picked up in June. However, core inflation remains below the central bank's target of 1.6%. And once we look at the details, an even more significant problem emerges. It is still mainly the prices of goods that are driving inflation, and not services as the Bank of Japan had hoped, which would indicate more "home-grown" inflation.”

“In the case of goods, it is still very likely that the depreciation of the JPY over the past 12 months is playing a role. If the JPY were to stabilize, this inflation driver would also be lost. The Bank of Japan must continue to hope that the headwind from US interest rates will fade significantly in the coming months, allowing the JPY to stabilize without having to constantly defend itself against it.”