The BOJ meeting is now behind us. So it’s back to reviewing data and the market reaction to the fundamental drivers behind the yen.

Coming up next, we have inflation data from Japan which is is the last major data we will see over the next week. We could see the fundamental trend for the currency set during the early session tomorrow.

As everyone knows at this point, Japan’s inflation hasn’t been anywhere near the BOJ’s target in, well, years.

In fact, the central bank’s focus has shifted to be more on the economic situation than pushing for price growth. But that doesn’t mean the market won’t react to the data. It just means that the impact on potential monetary policy is not as much as in other countries.

What We Are Expecting

There are three main measures that are published all at once. While the core figure is usually seen as the most important, it’s the combination of the three that typically moves the market. Also, there is the release of a monthly figure, though generally that’s ignored in favor of the annualized data.

Expectations are for Japan’s August annualized CPI to expand slightly to 0.6% from 0.5% prior, driven by the more volatile items in the basket.

We can expect CPI ex-food, on the other hand, to drop to 0.4% from 0.6% in the prior month. And when we exclude food and energy (the core rate) we can expect it to come in at 0.5%. This is in comparison to 0.6% in the prior reading.

The Market Reaction

When we have such relatively small numbers, a difference of a couple of decimals from expectations can be quite significant. Therefore, the market reaction might be bigger than a comparative move in inflation in another country.

Core CPI has been drifting downwards since the middle of last year, and if the expectations were to be borne out, it would be the lowest since early 2017.

Since slow inflation is largely priced into BOJ analysis, lower inflation would be seen as positive for the yen. The closer to 0, the more incentive there is for people to seek refuge with the currency.

Higher inflation than expected would probably be seen as negative. A beat in expectations could lead to a continuation of the latest weakness in the yen.

The Other Data

Twenty minutes after the release of the inflation figures, we have some data that doesn’t move the currency markets but helps with fundamental analysis of the currency. That is foreign investment in Japanese capital markets since cash flows are one of the drivers or the currency value.

Lately, there have been outflows from the Japanese stock market, while inflows to Japanese bonds have been erratic.

The switch to fixed income is a sign of continuing interest in safe havens, and a general lack of expectations of further BOJ stimulus. While forex analysts and traders might be talking up BOJ interventionism, they don’t appear to be putting their money on the table.

The Trends and Future Issues

The government is still on track to raise sales taxes next month. This is expected to support inflation, even with the mitigating measures that the government has proposed.

However, this wouldn’t be a growth in “fundamental” inflation. It could lead to a reversal afterward, which we saw the last time the government raised taxes as the market adjusts to businesses passing on the increased costs.

The other factor that is more worrisome for the near term is the drop in both exports and imports. While the country’s trade deficit has narrowed, it has done so because of a significant drop in imports.

Even ahead of the expected tax hike, Japanese consumers are reluctant to spend, and demand is falling. This would imply further pressure on inflation in the future.