The Japanese yen responded with growth to the news that inflation in Japan accelerated again in April of this year after a decline at the beginning of the year. This likely reinforced the view that the central bank may have to revise its forecast, bringing it even closer to policy normalization.
According to today's data, core consumer prices, excluding fresh products, rose by 3.4% compared to the previous year. This was due to an increase in processed food prices and hotel rates, accelerating compared to the previous month. Although the result matched analysts' forecasts, the Japanese yen reacted with growth, allowing the USD/JPY pair to adjust from its local highs. We will discuss the technical picture in more detail below. The overall consumer price index in annual terms jumped to 3.5% after growing by 2.5% in March of this year.
The acceleration of the key inflation indicator is likely to strengthen the view of many observers of the Bank of Japan that the central bank will soon revise its forecasts regarding inflation rates, leading to speculation about a policy adjustment as early as July this year. The fact that core inflation continues to accelerate, reflecting businesses passing their costs onto consumers, will surely prompt policymakers to seriously consider adjusting their further actions. There is no doubt that in July, the Bank of Japan will raise its inflation forecast for this financial year.
Food prices rose 9% compared to the previous year, the biggest jump since 1976. Service prices increased by 1.7%, which is the highest growth since 1995. Prices excluding the impact of energy carriers and food, reflecting a deeper inflationary trend, also accelerated to the fastest pace since 1981.
The rise in utility prices remains a destabilizing factor in price trends in Japan. Currently, gas and electricity prices are restrained by government subsidies, masking the real strength of core inflation. According to Friday's data, without government assistance, overall inflation would be one percentage point higher. On Tuesday, Prime Minister Fumio Kishida's cabinet approved a request by major energy companies to raise electricity prices for the population starting in June, which is likely to increase inflationary pressure. This may give Kishida a reason to extend existing aid measures in the form of subsidies, which expire in September.
In its last quarterly report, the Bank of Japan predicted a rise in core prices of only 1.6% in the 2025 fiscal year, below the bank's target of 2%, which is unlikely to be reached during the forecast period. At the same time, the new Governor of the Bank of Japan, Kazuo Ueda, recently stated that as soon as the target inflation indicator is reached, he will adjust the existing policy, including the yield curve control program.
As some economists note, even if the Bank of Japan has to raise its inflation forecast even more, even in this case, a revision upwards will not push the central bank beyond the boundaries of its current monetary policy.
As for the technical picture of USD/JPY, taking the level of 137.90 could target 139.90, and the current downward correction observed after today's inflation data will certainly test dollar buyers. Defending 137.90 and breaking through 139.90 will open new growth prospects to 142.20 and 143.80. If pressure remains on the trading instrument and we see a break through 137.90, we can expect a larger downward movement towards 135.60 and 133.50.