Above-target CPI inflation supports BoJ rate hikes as Japanese Yen strengthens

• 156.25 is the approximate level for USD/JPY after a sharp fall in early Asian trading on Friday.
• For the first time this year, Japanese CPI inflation has exceeded the BoJ’s target.
• Expectations of an October policy meeting rate hike have eased following remarks by Fed policymakers.

156.25 is the approximate level for USD/JPY. Selling pressure persists in Friday’s early Asian session as a strong Japanese inflation report lifts the Japanese Yen (JPY) against the US Dollar (USD). Later on Friday, attention turns to the preliminary US S&P Global Purchasing Managers Index (PMI) reading.

Japan’s National Consumer Price Index (CPI) increased 2.1% year on year in September, up from 1.9% previously, according to figures published on Friday by the Statistics Bureau of Japan. Core CPI, which removes volatile fresh food prices but retains fuel costs, also rose 2.1% year on year in September, matching market expectations. That compares with August’s 1.8% increase, revised from 1.7%.

Excluding both fresh food and energy, CPI advanced 2.4% year on year in September. August’s increase was 2.0%, revised from 1.9%. The BOJ monitors this measure closely as a better indicator of demand-driven price pressures.

September’s inflation report put Japanese price growth above the Bank of Japan (BoJ) target for the first time in nine months. This strengthened the case for a near-term interest rate increase and supported the JPY.

Federal Reserve (Fed) officials, meanwhile, have conveyed little urgency to tighten policy further. Although Fed Chair Kevin Warsh was upbeat last week about the strength of the US economy, he offered no indication of whether additional hikes would be necessary or when they might come. According to the CME FedWatch Tool, traders assign a 92.8% probability to a Fed rate increase at the October 27-28 policy meeting.

October BoJ Hold Expected; Standard Chartered Highlights Hawkish Tone and JPY Risks

An unchanged policy rate is Standard Chartered analysts’ forecast for the Bank of Japan’s late-October meeting: “We expect the Bank of Japan (BoJ) to keep the policy rate unchanged at 1.25% at its 29-30 October meeting, following September’s 25bps hike.” Their outlook nevertheless remains hawkish, adding that “we expect policy makers to maintain a clearly hawkish tone,” as the focus of market debate changes: “As a result, the debate is increasingly shifting from whether the BoJ will hike again to when the next hike will occur.”

A very gradual tightening cycle remains Standard Chartered’s expectation. The bank states that “while December is now a live meeting, January 2027 remains our base case for the next hike,” while also highlighting the currency implications: “the BoJ has an incentive to continue policy normalisation to support yield differentials and reduce the risk of renewed JPY weakness, particularly if the Fed resumes tightening or maintains a restrictive policy stance for longer than expected.”

Warsh Highlights Investment and AI, Leaves Policy Options Open

At 5.6/10 on the FXS Speechtracker, Fed Chair Warsh’s speech came in modestly below the historical average of 6.1/10. The score points to caution despite positive remarks on structural growth and a surge in investment. His reference to being “over-scarred from the global financial crisis” highlights persistent risk aversion that restrains optimism about output, employment and inflation. Repeated refusals to prejudge the October and December meetings leave dollar traders looking to data-dependent outcomes rather than explicit guidance. By stressing AI’s near-term role in driving demand and the risks to financial stability, Warsh signalled medium-term policy vigilance without materially clarifying immediate rate expectations.

A 0.00-point move left the FXS Fed Sentiment Index unchanged at an elevated 127.51. Despite the slightly softer FXS Speechtracker score, the index remained firmly in hawkish territory. Its flat reading suggests markets regarded the remarks as largely consistent with existing expectations of restrictive policy. No new dovish signals were strong enough to alter the broader hawkish bias.

Technical Analysis: Resistance Cluster Keeps USD/JPY Capped

Following a recent peak above 160, USD/JPY continues to correct on the daily chart. A dense resistance zone remains overhead: the pair trades below the lower, middle and upper 20-day Bollinger bands, while the 100-day simple moving average (SMA) limits the broader trend. At 38.20, the Relative Strength Index (RSI) has dropped beneath the neutral 50 threshold. This suggests selling pressure remains dominant even after some of the pair’s overbought condition has unwound.

The first upside barrier is the lower 20-day Bollinger band at 156.75. Beyond that, the Bollinger midline at 157.85 presents the next obstacle to recovery. The upper Bollinger band at 159.00 and the 100-day SMA at 159.35 create a broader supply zone. A recovery above that cluster would be needed to temper the current bearish bias. Below 156.38, the dataset contains no nearby technical support levels, leaving the pair to seek fresh chart-based demand zones if losses deepen.

(The technical analysis of this story was written with the help of an AI tool. Know more.)