Above-target CPI inflation strengthens case for BoJ rate hikes as Japanese Yen gains ground

• Selling drags USD/JPY towards 156.25 during early Asian trading on Friday.
• For the first time this year, Japan’s CPI inflation moves above the BoJ’s target.
• Expectations of an interest rate increase at October’s policy meeting have eased following remarks by Fed policymakers.

Selling pressure keeps USD/JPY near 156.25 in Friday’s early Asian trading, as the Japanese Yen (JPY) gains against the US Dollar (USD) following Japan’s strong inflation report. Later on Friday, attention will turn to the preliminary US S&P Global Purchasing Managers Index (PMI) reading.

Japan’s National Consumer Price Index (CPI) increased 2.1% year-on-year in September, up from 1.9% previously, according to figures published by the Statistics Bureau of Japan on Friday. Core CPI, which removes volatile fresh food prices but retains fuel costs, also rose 2.1% year-on-year in September, matching market forecasts. That compares with August’s 1.8% increase, revised from 1.7%.

Excluding both fresh food and energy, CPI advanced 2.4% year-on-year in September, compared with a 2.0% rise in August, revised from 1.9%. The BOJ closely tracks this measure as a better indicator of demand-led price pressures.

The Yen drew support from the report, which strengthened the case for an interest rate increase in the near term. It showed that Japan’s September inflation had moved above the Bank of Japan (BoJ) target for the first time in nine months.

In the US, Federal Reserve (Fed) officials’ comments suggested there was little immediate need to tighten policy further. While Fed Chair Kevin Warsh sounded optimistic last week about the strength of the US economy, he offered no signal on whether additional rate increases would be necessary or when they might come. The CME FedWatch Tool puts traders’ estimated probability of a Fed rate increase at the October 27-28 policy meeting at 92.8%.

Could a hawkish BoJ hold in October leave JPY risks in focus for Standard Chartered?

An unchanged policy rate is the expectation of Standard Chartered analysts for the Bank of Japan’s late-October meeting. They state, “We expect the Bank of Japan (BoJ) to keep the policy rate unchanged at 1.25% at its 29-30 October meeting, following September’s 25bps hike.” Their outlook nevertheless remains hawkish: “we expect policy makers to maintain a clearly hawkish tone,” they add. They describe the changing market debate as follows: “As a result, the debate is increasingly shifting from whether the BoJ will hike again to when the next hike will occur.”

A measured tightening cycle remains central to Standard Chartered’s outlook. The bank says that “while December is now a live meeting, January 2027 remains our base case for the next hike,” highlighting its expectation of a very gradual pace of rate increases. It also sees currency considerations supporting further normalisation, arguing that “the BoJ has an incentive to continue policy normalisation to support yield differentials and reduce the risk of renewed JPY weakness, particularly if the Fed resumes tightening or maintains a restrictive policy stance for longer than expected.”

What does Warsh’s investment and AI focus signal without a policy commitment?

Dollar traders remain focused on data-dependent decisions rather than firm guidance after Fed Chair Warsh repeatedly declined to prejudge the October and December meetings. His speech registers 5.6/10 on the FXS Speechtracker, slightly below the historical average of 6.1/10. That softer reading points to caution despite positive remarks about structural growth and a surge in investment. His reference to being “over-scarred from the global financial crisis” highlights persistent risk aversion, qualifying the optimism over output, employment and inflation. By stressing AI’s role as a near-term demand-side force alongside financial stability risks, Warsh signals vigilance over the medium term while providing little additional direction for immediate rate expectations.

Despite the slightly softer FXS Speechtracker score, the FXS Fed Sentiment Index remained firmly in hawkish territory at an elevated 127.51, recording a change of 0.00 points. Its unchanged reading indicates that markets regarded the comments as largely consistent with prevailing expectations of restrictive policy. There were no new dovish signals strong enough to alter the broader hawkish bias.

Technical Analysis: Can USD/JPY break through its dense resistance zone?

Downward pressure continues to dominate the USD/JPY daily chart as the correction from its recent peak above 160 extends. A substantial resistance zone remains overhead: the pair trades below the lower, middle and upper bands of the 20-day Bollinger Bands, while the 100-day simple moving average (SMA) constrains the broader trend. At 38.20, the Relative Strength Index (RSI) has dropped beneath the neutral 50 threshold. This suggests selling pressure still prevails even though some of the pair’s overbought condition has already unwound.

Any recovery first faces the 20-day Bollinger lower band at 156.75, ahead of the midline at 157.85. Beyond these levels, a broader supply zone comprises the upper Bollinger band at 159.00 and the 100-day SMA at 159.35; the pair would need to regain this area to reduce the prevailing bearish bias. Below 156.38, the dataset contains no nearby technical support levels, leaving a further decline to seek out new demand zones on the chart.

(The technical analysis of this story was written with the help of an AI tool. Know more.)