Next: Japan August CPI

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.

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