Japanese Yen holds steady as Bank of Japan deputy emphasises inflation risk

• USD/JPY holds near 158.00 despite inflation warning from BoJ Deputy Governor Himino.
• Seven months of Japanese core inflation below 2% span two BoJ rate increases.
• Thursday's September core CPI release is expected to show 2.1%, up from 1.7%.

Core inflation in Japan remained below the Bank of Japan's (BoJ) 2% target throughout the seven months to August, even as the bank raised rates twice this year, reaching 1.25% in September. Trading near 158.00, USD/JPY has spent 12 sessions within a 157.50-159.00 band. The range remained intact on Wednesday after BoJ Deputy Governor Himino said underlying inflation was approaching 2% and price risks were tilted to the upside.

Himino warns against delayed action eight weeks before the next likely policy move

With upside inflation risks still elevated, Deputy Governor Himino cautioned that a late policy adjustment could allow those risks to materialise. Financial conditions remained accommodative in his assessment, reflecting low real interest rates and rapid growth in bank lending. An initial modest rise in the Yen following his comments subsequently unwound, leaving it within Wednesday's trading range.

A hold at 1.25% on October 30 is expected by Kyodo, while swaps imply about a 75%-80% chance of an increase on December 18. September's Japanese trade deficit stood at ¥536.6 billion, roughly three times the ¥181 billion forecast. Exports increased 16.7% year on year, short of the 20.1% forecast. Whatever Deputy Governor Himino's inflation assessment, a deficit of that scale means Yen must be sold to fund imports.

Yield gap and Ministry of Finance intervention risk keep the Yen constrained

Between April 28 and May 27, Japan's Ministry of Finance purchased ¥11.74 trillion of Yen. It then acted alongside the US Treasury in late July after USD/JPY exceeded 160.00. Following a stronger-than-expected US inflation reading, Finance Minister Katayama repeated his warnings on October 15; the pair has not moved above 159.00 since.

These opposing forces leave USD/JPY confined to its range. Downside is limited by a US 10-year Treasury yield near 5.1%, compared with a Japanese 10-year yield that hit about 3.1% on October 7 before returning to around 2.9% by October 16. Meanwhile, the prospect of renewed Yen purchases restricts the upside. Although Finance Minister Katayama has not specified an intervention threshold, traders have focused on the level breached by USD/JPY ahead of the previous intervention.

Core CPI at 2.1% would exceed target despite electricity subsidies

Due at 23:30 GMT on Thursday, Japan's September national Consumer Price Index (CPI) is expected to show core inflation excluding fresh food rising to 2.1% from 1.7%. August's headline rate was 1.9%, as was the measure stripping out food and energy. Government energy subsidies helped push electricity prices down 2.4% year on year in August, partly explaining why core inflation remained below 2% through both BoJ rate increases.

Two policymakers opposed the BoJ's September increase on the grounds that inflation remained below 2%, leaving the vote at 7-2. Should the reading reach 2.1%, that objection would no longer hold a month after it was raised and a week before the next policy decision.

Nevertheless, a robust release would reinforce the prospect of a December increase rather than shift it forward to October 30. The benefit to the Yen may therefore be smaller than the headline figure implies. Friday's University of Michigan survey, due at 14:00 GMT, is expected to put US household inflation expectations at 4.7% for the next year and 3.5% over five years. US yields remain the factor holding USD/JPY nearer 160.00 than 155.00.

USD/JPY remains bounded by 157.50-159.00 as key levels hold

Resistance: Monday's and Tuesday's advances stalled at 158.50. Since October 6, no session has broken above 159.00, and the October 14 peak fell just short of that mark. Beyond it, 160.00 marks the threshold USD/JPY crossed ahead of July's intervention.

Support: The 200-day Exponential Moving Average (EMA), slightly below 158.00, arrested Wednesday's decline. Every session since October 6 has respected 157.50, while the October 2 trough lies a little below 157.00.

Bias: The long bias remains valid provided closing prices hold above 157.50, with targets at 158.50 followed by 159.00. Rather than gathering strength for a breakout, momentum within the range is weakening: the daily Stochastic Relative Strength Index (Stoch RSI) has dropped to around 56 from over 80 in early October. A daily close beneath 157.50 invalidates the long position.

Daily USD/JPY chart