Japanese Inflation Hits Lowest Level Since May 2018

The latest Japanese inflation data did little to inspire hope in a change-of-course for BOJ policy anytime soon. Core inflation, which strips out energy and food prices for December grew just 0.7% year on year. This data was down from the prior month’s 0.9% reading and still well below the bank’s 2% target. Indeed, CPI is now sitting at its lowest level since 2018.

Headline inflation, including energy prices and food prices, rose just 0.3% in December, year over year. The components offering the strongest positive contribution were fuel, light, water and medical care. The overall downshift in inflation was due mainly to the fall in house prices and communication fees. 

The BOJ had a very frustrating year in 2018 when it came to battling to push inflation higher. With weakening economic activity and still depressed wage growth, the annual figure for 2018 ended the year at just 1%, half of the BOJ’s 2% target.

This latest data keeps BOJ policy change expectations constrained and is likely to see the BOJ lowering its inflation forecasts further.

Technical Perspective

After piercing below the rising trend line from 2016 lows, USDJPY rebounded sharply to close back above and is now once again challenging the bearish trend line from 2016 highs. Above here, focus will shift back to a move up to the 114.50s region which has been key resistance in USDJPY over the last two years.