Japan’s headline CPI rose to 1.5% year on year in March, up from 1.3% in February. Core-core CPI was 2.4% year on year, down from 2.5% in February.
Price pressures are building, but government fuel subsidies are holding down the headline figure. Higher crude prices may feed through to inflation over time.
Bank Of Japan Inflation Outlook
The Bank of Japan is reportedly considering a sharp increase to its inflation forecast in its next quarterly outlook. The timing of any rate hike may be delayed until June, with uncertainty linked to the Middle East.
USD/JPY may stay supported if oil prices remain high and there is no BoJ rate rise next week. The exchange rate is still expected to stay below 160 due to the risk of verbal intervention from Finance Minister Katayama.
Looking back at this analysis from the spring of 2025, we see the forecast was largely correct for that time. The Ministry of Finance did step in with yen-buying intervention in late April and early May 2025, which successfully pushed USD/JPY back down from the 160 level. This confirmed that the 160 mark was a significant line for policymakers.
The underlying inflation pressures mentioned did persist throughout last year. As predicted, the Bank of Japan eventually raised its inflation forecast and followed with a modest 15 basis point rate hike in July 2025 when core inflation failed to fall below 2.5%. This move, however, did little to close the wide interest rate gap with the US.
Energy Prices And Yen Pressure
The support from high energy costs has also remained a constant factor. With Brent crude having trended up from $90 in late 2025 to over $95 a barrel now, Japan’s trade deficit continues to weaken the yen. This fundamental pressure is a key reason why the pair has managed to grind higher again.
Now, with USD/JPY currently trading around 162.80, the old 160 cap has been broken, suggesting intervention is becoming less effective or the tolerance for yen weakness has increased. Derivative traders should consider strategies that benefit from high volatility, such as buying straddles, as the risk of a sudden, sharp move is elevated. This positions for either another leg up driven by fundamentals or a dramatic reversal if the government decides to intervene more forcefully.
