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• Inflation in Japan reaccelerates but the JPY fails to strengthen
• The Bank of Japan says it sees no need to change its policy
• USD/JPY on track for a new yearly high

The last trading day started with a bang for JPY traders. Earlier in the day, the National Core CPY YoY was released in Japan, showing that inflation accelerated to 3.3% annually.

The value is above the Bank of Japan’s definition of price stability, so the data should have weighed on the JPY pairs (i.e., it should have triggered a lower move in the JPY pairs). But it had the opposite effect.

Indeed, a few hours later, the JPY pairs rallied hard, with USD/JPY trading above 141.50 and EUR/JPY above 157.50. Earlier today, the two pairs traded two big figures (i.e., two hundred pips) lower.

So what triggered the rally? Unsurprisingly, it was the Bank of Japan.

It said that it sees little need to act on the yield curve control measures for now, despite the pick-up in inflation.

Many traders hoped that the Bank of Japan would change its monetary policy at next week’s meeting, but the central bank is in a tough position.

On the one hand, inflation accelerated above its target, so it should act by changing its current easing policy. On the other hand, the economic growth forecast was recently downgraded.

One question, though, is more important for USD/JPY traders. Now that the Federal Reserve is coming close to reaching the terminal rate, why would the Bank of Japan start tightening?
 

USD/JPY is on track to 152, EUR/JPY to 165

In this article published earlier in the week, I argued that the USD/JPY should make a new high above 152. Nothing has changed from a technical perspective since then, except that the pair now trades three hundred pips higher. Therefore, the target remains valid regardless of next week’s Fed decision, as the news from the Bank of Japan has more impact on the JPY pairs.

The same is valid for EUR/JPY. Only this time, given the EUR resilience, it should catch a bid when the EUR/USD rallies.

All in all, 165 for EUR/JPY and 152 for USD/JPY are possible and probable.

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