Asian stocks fell on Friday and the yen strengthened as Tokyo inflation data exceeded expectations. The yen rose to its highest level against the dollar in more than a month. The dollar fell against major currencies, with the dollar strength index posting its first weekly decline in two months.
As of press time, USD/JPY fell below the 150 mark for the first time since October 21, down nearly 0.7% on the day. The yen rose nearly 3% this week.
Data released by the Ministry of Internal Affairs and Communications on Friday showed that consumer prices in the capital, excluding fresh food, rose 2.2% year-on-year in November, faster than the 1.8% increase in the same period last year. The result was 2% higher than the median forecast of economists. As food prices also pushed up the inflation rate, the overall inflation rate accelerated to 2.6%. This helped the appreciation of the yen.
The data is likely to keep market participants speculating on a Bank of Japan rate hike next month as it suggests Japan’s inflationary momentum remains. Market expectations for a rate hike this month have roughly doubled as Bank of Japan Governor Kazuo Ueda has repeatedly said he would raise borrowing costs if the economy performs in line with the central bank’s view.
Friday's Tokyo CPI data is the last government inflation report before the Bank of Japan decides its benchmark interest rate on Dec. 19. Swap market pricing shows a more than 50 percent chance that the Bank of Japan will raise rates at its meeting next month. Last week, Ueda said he could not predict the outcome of the meeting, suggesting that the next meeting would involve a live discussion on whether to raise rates.
Former Prime Minister Fumio Kishida decided to slash energy subsidies from this month in a phase-out of what was supposed to be a temporary measure, but Kishida's successor, Shigeru Ishiba, has decided to re-implement the measure from January next year. The impact of subsidies tends to be reflected in inflation data with a lag.
"The CPI report is likely to reinforce the Bank of Japan's belief that inflation momentum is building and that its 2% target is looking increasingly secure," said Taro Kimura, an economist at Bloomberg Economics.
The Bank of Japan’s 0.25% policy rate is expected to change soon. More than 80% of economists surveyed by Bloomberg predict that the Bank of Japan will raise interest rates again before January next year. Before the release of Tokyo’s CPI data, a series of recent economic data, including GDP, have shown a moderate recovery in the economy. Japan’s national inflation rate has remained at or above the Bank of Japan’s 2% target for more than 30 months, weakening consumers’ purchasing power.
Other data from Japan's Ministry of Industry and Trade on Friday showed industrial production rose 3.0% month-on-month in October, while retail sales rose 0.1%. Consumption remains key to Japan's economy, while production may face headwinds as countries prepare for the impact of U.S. President-elect Donald Trump's tariffs.
Ishiba has already announced a stimulus package to support economic growth and shield consumers from some of the effects of inflation, and the cabinet is expected to approve an extra budget later on Friday.
“Pressure for yen strength is increasing amid expectations of a rate hike at the Bank of Japan’s December meeting,” Yujiro Goto, head of foreign exchange strategy at Nomura Securities, wrote in a note. “The momentum of the Trump deal has also run its course, pressure for dollar strength has eased, and the yen is gaining favor as a target for dollar selling.”
Article forwarded from: Jinshi Data