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

• Early Asian trading on Friday sees USD/JPY fall sharply towards 156.25.
• For the first time this year, Japan’s CPI inflation exceeds the BoJ’s target.
• Expectations for a rate increase at October’s policy meeting ease following remarks from Fed policymakers.

Japan’s strong inflation report lends support to the Japanese Yen (JPY) against the US Dollar (USD), leaving USD/JPY under continued selling pressure near 156.25 in Friday’s early Asian trading. Later on Friday, attention turns to the preliminary US S&P Global Purchasing Managers Index (PMI) release.

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

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

With September inflation above the Bank of Japan’s (BoJ) target for the first time in nine months, the report strengthened the argument for a near-term interest rate rise and supported the JPY.

In the US, Federal Reserve (Fed) officials’ comments have suggested there is little immediate need for additional policy tightening. Fed Chair Kevin Warsh spoke positively about the strength of the US economy last week, without signalling whether further rate increases would be necessary or when they might come. According to the CME FedWatch Tool, traders assign a 92.8% probability to a Fed rate rise at the October 27-28 policy meeting.

BoJ expected to hold in October as Standard Chartered highlights hawkish stance 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 the bank’s expectation, with Standard Chartered stating that “while December is now a live meeting, January 2027 remains our base case for the next hike,” while also arguing that “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 surge and AI while leaving policy options open

At 5.6/10, Fed Chair Warsh’s speech registers modestly below the historical average of 6.1/10 on the FXS Speechtracker. The reading points to a cautious delivery, notwithstanding his positive assessment of structural growth and surging investment. His reference to being “over-scarred from the global financial crisis” highlights persistent risk aversion, tempering optimism over output, employment and inflation. Repeated refusals to prejudge the October and December meetings leave dollar traders looking to incoming data rather than clear policy guidance. By stressing AI’s role as a near-term source of demand and highlighting financial stability risks, Warsh indicates continued vigilance over the medium term, but provides little new direction for immediate rate expectations.

Despite the slightly softer FXS Speechtracker score, the FXS Fed Sentiment Index held at an elevated 127.51, a change of 0.00 points that leaves it firmly in hawkish territory. Its unchanged reading suggests markets regarded the speech as largely consistent with existing expectations for restrictive policy. Any new dovish signals were insufficient to alter the prevailing hawkish bias.

Technical Analysis: USD/JPY trades below a tightly packed resistance zone

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

Any recovery would first encounter the lower 20-day Bollinger band at 156.75, before the midline at 157.85 presents the next obstacle. Beyond that, the upper Bollinger band at 159.00 and the 100-day SMA at 159.35 create a broader supply zone. A recovery above this area would be needed to temper the current bearish bias. Below 156.38, the dataset identifies no nearby technical support, meaning further losses would leave USD/JPY seeking new areas of demand on the chart.

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