The rise in CPI in the Tokyo metropolitan area and the trend of the dollar and yen: impact analysis amid rising expectations for the Bank of Japan's interest rate hike
The consumer price index (CPI) for the Tokyo metropolitan area in June exceeded market expectations, and expectations for additional interest rate increases by the Bank of Japan are growing. We will analyze in detail how this important economic data affects the dollar and yen.
✔️ Background
According to data released by the Ministry of Internal Affairs and Communications, core CPI (excluding fresh food) in the Tokyo metropolitan area rose 2.1% compared to the same month last year. It exceeded market expectations by 2.0%. This means that the Bank of Japan has recovered to its target 2% level for the first time in 3 months. Also, the core core CPI, which excludes fresh food and energy, also rose 1.8%, and growth expanded from 1.7% the previous month. As a result, the possibility that the Bank of Japan will consider additional interest rate increases as a countermeasure against inflation has increased.
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✔️ Factors affecting the dollar and yen appreciation of the yen
1. Expectations for the Bank of Japan's interest rate hike
Normally, when interest rates rise, the value of that currency also tends to rise. If the Bank of Japan raises additional interest rates, there is a possibility that the value of the yen will increase and the appreciation of the yen will progress.
2. Effects of controlling inflation
By suppressing inflation, the purchasing power of yen is maintained, which is a factor in yen appreciation.
Factors contributing to the depreciation of yen
1. Continuation of the depreciation trend of yen
Currently, the yen has a long-term trend of depreciation of the yen. This is because interest rate differences between Japan and other countries (especially the United States) are large. The background is that while interest rates in the US remain high, interest rates in Japan are at a relatively low level.
2. The impact of the global economy
Global risk-on and risk-off movements and the strength of the US dollar (trend in the dollar index) will also have an impact. If the US economic indicators are strong, the US dollar will strengthen, and the dollar yen will easily rise.
✔️ A Holistic View
Possibility of a short-term appreciation of the yen There is a possibility that the yen will temporarily appreciate as expectations for interest rate increases from the Bank of Japan increase. However, since market expectations are factored into actual policy decisions, there is also a risk that the yen will depreciate in reverse if predictions are off.
・Long-term trends in the dollar and yen
Unless the Bank of Japan continues to raise interest rates, there is a high possibility that the basic yen depreciation trend will continue. In particular, if interest rates in the US continue to stay high, it is expected that interest rate differences will be maintained and the strength of the dollar will continue.
✔️ Conclusions
Expectations for additional interest rate increases by the Bank of Japan based on CPI data for the Tokyo metropolitan area will be a factor in the short-term appreciation of the yen, but it is expected that long-term trends in the dollar and yen will still be strongly influenced by interest rate trends in the United States and the global economy. Therefore, it is important for investors to develop strategies based on long-term fundamentals while paying attention to short-term volatility.
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