USD/JPY is trading directionless just below 159.00 as Japanese inflation slowed in February, with both headline and core CPI falling more than anticipated to near four-year lows at 1.3% year-on-year (consensus: 1.5%, prior: 1.5%) and 1.6% year-on-year (consensus: 1.7%, prior: 2.0%), respectively [1]. The decline in inflation was attributed to government measures aimed at reducing the household burden of higher energy prices [1]. Excluding energy and fresh food, CPI dipped 0.1 percentage points to a 13-month low at 2.5% year-on-year (consensus: 2.6%), but remains above the Bank of Japan’s fiscal 2026 projection of 2.2% [1].
Despite the softer inflation data, underlying inflation is still tracking above BoJ targets, and strong results from Japan’s latest spring wage negotiations are seen as supporting further policy normalization. Rengo, Japan’s largest union federation, is demanding an average wage increase of 5.94% this year compared to 6.09% last year, marking the third consecutive year of wage increase demands exceeding 5% [1].
Brown Brothers Harriman’s Elias Haddad notes that these sticky wage dynamics justify the BoJ resuming rate hikes at the upcoming April 28 meeting, with a 25 basis point hike to 1.00% currently 62% priced-in by the market [1].
The market implications are that the USD/JPY remains directionless, reflecting uncertainty as investors await confirmation of a potential BoJ rate hike, which is supported by persistent wage growth and underlying inflation above target projections [1].
CONCLUSION
Japanese inflation slowed in February, but underlying wage dynamics and inflation remain robust, supporting expectations for a Bank of Japan rate hike at the April 28 meeting. The USD/JPY is trading directionless as markets await further clarity, with a 25bps hike currently 62% priced-in. Persistent wage growth and inflation above BoJ targets are key drivers for potential policy normalization.