Hotter-Than-Expected Core Inflation in Japan Sparks Rate Hike Talk, Threatens Crypto

Just when it appeared that the yen scare could be easing, Japan has reported an uptick in core inflation.

Data released early Friday showed Japan's core inflation, which stripes out prices for fresh food, rose 3% year-on-year in February, moderating from January's 3.2% but beating the consensus forecast for 2.9%. The headline consumer price index eased to 3.7% from 4%.

Overall, both indices remained well above the Bank of Japan's 2% inflation target, validating the central bank chief Haruhiko Kuroda's declaration of victory over decades of deflation. Notably, since November, Japan’s headline inflation has been running hotter than that of the U.S.—almost 100 basis points (bps) higher now.

The sticky inflation, plus wage hikes from the shunto wage negotiations, have bolstered calls for BOJ rate hikes. In other words, a potential yen rally, known to destabilize risk assets, including cryptocurrencies, is back on the table.

As of writing, the dollar-yen (USD/JPY) pair traded at 149.22, having bounced nearly 300 pips in a sign of renewed yen weakness since March 11, according to data source TradingView.

That said, the narrowing or declining U.S.-Japan 10-year bond yield spread supports yen strength. Japanese yields have been rising across the curve, offering bullish cues to the yen. As of writing, Japan’s 10-year bond yield held above 1.5%, and the 30-year yield was above 2.5%, both at multi-decade highs.

A renewed yen strength could translate into risk aversion, the likes of which we saw in August last year.