Japan’s headline inflation fell to 2.2%, and the so-called ‘core-core’ (ex-fresh food and energy) fell to 2.2% after a third monthly increase of 0.2%. If inflation is going to settle around 2%, rather than fall all the way back to the 10-year average (just over 1%), there is no reason to delay the demise of negative interest rate and yield curve control policies. Especially given that the Yen has lost a third of its value since the start of the Covid pandemic, and USD/JPY remains close to its post-1990 high.

This pair has the capacity for huge and persistent overshoots. CFTC data suggest that under four weeks before the crucial BoJ meeting, when one of the largest US/Japanese policy divergences we have seen will probably start to unwind, futures traders remain doggedly short the Yen. Will they be proved geniuses, or fools because a change of BoJ policy direction, ahead of a likely change of Fed policy direction later this year, signals a turn in USD/JPY? We’re in the latter camp – how could we not be? What (if anything) am I missing?