Yen Fragility Persists: Inflation Miss Cements BoJ 'Hold' Expectation

Tokyo — The Japanese Yen (JPY) continues to trade on the defensive, hovering near 158.50 against the USD, as the latest inflation prints undercut the hawkish narrative required to support the currency.

Inflation Cools, Handcuffing the BoJ

Fridays data from the Japan Statistics Bureau revealed a deceleration in price pressures:

• National CPI: Fell to 2.1% YoY in December (down from 2.9%).
• Core-Core CPI: Dipped to 2.9%, a nine-month low.

This cooling allows Governor Ueda and the Bank of Japan (BoJ) to maintain their ultra-loose stance at next week's policy meeting. Markets had priced in a slim chance of a hike to combat currency weakness, but the data provides “air cover” for inaction.

The 'Widow Maker' Returns

The bond market is increasingly volatile. The spread between 2-year and 30-yearJGBs has hit record highs as investors dump long-dated debt, fearing that Japans massive debt pile makes fiscal consolidation impossible.

With Prime Minister Takaichi pushing for fiscal expansion (tax cuts) while the BoJ remains passive, the macro divergence with the US remains wide.

Forex Outlook

Unless the BoJ surprises with a hawkish signal or the Ministry of Finance intervenes aggressively, the path of least resistance for USD/JPY remains higher, potentially targeting the 160.00 psychological level again if US yields continue to firm.