Japan’s latest inflation data has exceeded expectations, sparking speculation that the Bank of Japan (BOJ) could raise interest rates sooner than anticipated. However, with the USD/JPY pair remaining steady and bond yields experiencing a reversal, questions arise about whether the yen’s recent strength is losing momentum.

Key Developments:

• Japanese core inflation jumps to 3.2%, marking a 19-month high
• Bond yields initially spike but later retreat after government intervention
• USD/JPY holds firm, indicating possible preemptive yen buying
• Key technical level at 149.40 remains crucial for future price movements

Inflation Surge and Market Reaction

Japan’s core inflation, which excludes fresh food prices, rose to 3.2% year-over-year in January, up from 3% in December and slightly above market expectations. This marks the fastest increase since mid-2023, pushing well beyond the BOJ’s 2% inflation target. Including fresh food, overall inflation hit 4%, the highest in two years, while inflation excluding both fresh food and energy stood at 2.5%, its highest rate in over a year.

Despite these inflationary pressures, the USD/JPY pair showed little reaction, suggesting that traders may have already factored in the strong inflation print. The yen saw sharp gains earlier in the week, hinting at speculative positioning ahead of the data release.

Government Intervention and Bond Market Reversal

Following the inflation report, Japan’s two-year government bond yields briefly surged to their highest level since 2008, reflecting shifting expectations for BOJ policy changes. Similarly, 10-year bond yields also climbed but later retreated after Japan’s Finance Minister Katsunobu Katō signaled concerns about the impact of rising long-term rates on the country’s fiscal stability. This intervention suggests that authorities may attempt to manage the pace of rising yields, which could influence future currency moves.

Yield differentials, particularly those driven by Japan, have played a significant role in USD/JPY movements. Katō’s remarks could make it harder for the pair to sustain the downside momentum observed earlier in the week.

What’s Next for USD/JPY ?

Despite breaking below 149.40, USD/JPY has struggled to sustain downward momentum. The December 2024 swing low at 148.65 remains a key level for traders watching for further declines. However, any signs of a reversal in short-term price action could set the stage for a bounce back toward the 150 level.

Technical indicators still favor a bearish outlook in the near term, with selling rallies remaining a preferred strategy. However, given the government’s apparent discomfort with rising yields, traders should remain cautious of any policy-driven shifts that could impact yen movements in the coming sessions.