Inflation and BoJ’s cautious rate policy weigh on the yen – London Business News | Londonlovesbusiness.com

The Japanese yen continues to face pressure from domestic challenges and a strong U.S. dollar, which has increased import costs and contributed to inflation concerns.

In October, Japan’s wholesale inflation recorded its fastest annual rise in over a year, with the corporate goods price index (CGPI) climbing 3.4% year-on-year, exceeding expectations.

Rising costs for essentials like rice, nonferrous metals, food, and oil have intensified the strain on Japanese businesses, already contending with higher input prices due to the yen’s depreciation.

These persistent inflationary pressures complicate the Bank of Japan’s (BoJ) policy decisions, as the central bank navigates how best to manage interest rates. With inflation dynamics currently elevated and the yen weakened further by a strong dollar, the near-term outlook for the yen remains bearish, with limited immediate support from the BoJ’s cautious stance.

While inflation may push the BoJ to consider a rate hike in December, the bank remains cautious about altering its policy. BoJ Governor Kazuo Ueda has suggested that future rate increases would hinge on domestic-driven inflation and wage growth, rather than import-led price rises. This careful approach could keep bond yields volatile as markets look for policy hints, while the medium-term outlook for the yen remains bearish. Bond yields may gradually rise if inflationary pressures persist, potentially prompting policy adjustments.