Tokyo inflation lower than expected, yen extends losses

[Ben Graham]

The Japanese yen is down for a second straight day. In the European session, USD/JPY is trading at 147.87, up 0.60% on the day. The yen climbed 1.2% early in the week but has reversed directions and pared most of these gains.

Tokyo Core CPI falls to 2.9%

Tokyo Core CPI, which excludes fresh food, rose 2.9% y/y in July, down from 3.1% in June and below the consensus of 3.0%. Tokyo Core CPI has slowed for a second straight month but still remains well above the Bank of Japan's target of 2%. The driver behind the deceleration was lower costs for energy, water and rice. Still, food prices, especially rice, have been soaring and disgruntled voters punished the government in the recent election, depriving it of a majority in parliament.

The so-called "core-core CPI", which excludes fresh food and fuel and is closely monitored by the BoJ, remained unchanged at 3.1% and matching the consensus. The BoJ wants to see sustainable underlying inflation and this strong reading is encouraging.

BoJ expected to hold rates next week

The BoJ meets next week and is widely expected to consider its wait-and-see stance. The central bank hasn't raised rates since January, as US President Trump's tariffs stifled any hopes that that the BoJ would gradually raise rates in the first half of the year.

This week's announcement that the US and Japan had reached a trade deal has raised expectations that the BoJ will hike rates before the end of the year. Deputy Governor Shinichi Uchida said that the trade deal removed uncertainty and raised the likelihood that inflation would remain sustainable at 2%, a prerequisite for further rate hikes.

The BoJ isn't likely to change any policy settings at the upcoming meeting, but will provide an updated quarterly report which will likely refer to the US-Japan agreement. The BoJ could revise upwards its inflation forecast, which would raise expectation of a rate hike in the coming months.

USD/JPY Technical

• USD/JPY has pushed above resistance at 147.12 and 147.47. Above, 148.11 is under pressure
• 146.48 and 146.13 are the next support levels

USDJPY 1-Day Chart, July 25, 2025

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