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

• 158.00 remains the anchor for USD/JPY, little changed despite BoJ Deputy Governor Himino's inflation warning.
• 2% remains out of reach for Japan's core inflation for seven months, despite two BoJ rate increases.
• 2.1% is the forecast for September core CPI due on Thursday, up from 1.7%.

1.25% is the Bank of Japan's (BoJ) policy rate following its September increase. The central bank has lifted rates twice this year, although core inflation remained below its 2% target throughout the seven months to August. Near 158.00, USD/JPY has spent 12 sessions within a 157.50 to 159.00 band. On Wednesday, BoJ Deputy Governor Himino put underlying inflation at almost 2% and said price risks were skewed upwards. His comments left the pair within that range.

Eight weeks before the next likely move, Deputy Governor Himino warns against delay

Delaying a policy adjustment could allow elevated upside inflation risks to materialise, Deputy Governor Himino said. Low real interest rates and rapid bank lending growth meant financial conditions remained accommodative, in his assessment. The Yen briefly strengthened in response before surrendering those gains within Wednesday's trading range.

For the 30 October decision, Kyodo expects an unchanged BoJ rate of 1.25%. Swaps put the probability of an increase on 18 December at about 75%-80%. Meanwhile, Japan reported a September trade deficit of ¥536.6 billion, roughly three times the ¥181 billion forecast. Exports rose 16.7% year on year, short of the projected 20.1%. Regardless of Deputy Governor Himino's inflation comments, financing imports with a deficit of that scale requires Yen selling.

Yield gap and finance ministry intervention constrain the Yen

Between 28 April and 27 May, Japan's Ministry of Finance purchased ¥11.74 trillion of Yen. It then took joint action with the US Treasury in late July after USD/JPY exceeded 160.00. Following the hot US inflation reading, Finance Minister Katayama repeated his warnings on 15 October. The pair has remained at or below 159.00 since.

These opposing forces leave USD/JPY confined to a range. The US Treasury 10-year yield stands near 5.1%, while Japan's 10-year yield returned to around 2.9% by 16 October after reaching about 3.1% on 7 October. That gap limits the pair's downside; the prospect of renewed Yen purchases restricts its upside. Although Finance Minister Katayama has specified no intervention threshold, traders have focused on the level breached before the previous intervention.

2.1% core CPI would exceed target despite electricity subsidies

2.1% is the forecast for Japan's September core inflation, excluding fresh food, against the previous 1.7%. The national Consumer Price Index (CPI) release is scheduled for Thursday at 23:30 GMT. August headline inflation stood at 1.9%, matching the measure excluding food and energy. With government energy subsidies taking effect, electricity prices dropped 2.4% year on year in August. That partly explains why core inflation stayed below 2% through both BoJ rate increases.

A 7-2 vote approved the BoJ's September rate increase. Both dissenters cited inflation remaining below 2%. Should the reading reach 2.1%, that objection would no longer hold, a month after it was raised and a week ahead of the next decision.

Even a robust release, however, would reinforce the case for a December increase rather than advance it to 30 October. Its support for the Yen may therefore be weaker than the headline implies. Due on Friday at 14:00 GMT, the University of Michigan survey is forecast to put US household inflation expectations at 4.7% for the next year and 3.5% over five years. US yields remain the reason USD/JPY sits nearer 160.00 than 155.00.

157.50-159.00: Key levels for the Yen

Resistance: Monday's and Tuesday's highs met resistance at 158.50. Every session since 6 October has been capped at 159.00, with the 14 October peak marginally below that mark. Before July's intervention, USD/JPY had breached 160.00.

Support: Just below 158.00, the 200-day Exponential Moving Average (EMA) arrested Wednesday's decline. Support at 157.50 has survived every session since 6 October. The low recorded on 2 October lies slightly below 157.00.

Bias: The long bias holds while closing levels remain above 157.50, targeting 158.50 first and 159.00 next. Momentum is weakening within the range rather than gathering towards a breakout: the daily Stochastic Relative Strength Index (Stoch RSI) has dropped to about 56 from above 80 in early October. A daily close below 157.50 invalidates the long position.

USD/JPY: Daily price chart