In January, the Consumer Price Index (CPI) for Tokyo increased by 1.5% compared to the same month last year. This is a drop from 2.0% in December, according to the Statistics Bureau of Japan. The CPI that excludes Fresh Food rose by 2.0%, which is slightly below the expected 2.2%. The same is true for the CPI excluding both Fresh Food and Energy. The USD/JPY exchange rate fell by 0.17% to 153.12. The Japanese Yen gained strength against the US Dollar, which dropped by 0.24%, and it did well against other major currencies too. For instance, the Yen rose by 0.28% against the Euro and 0.17% against the British Pound.

Tokyo CPI as a Predictor

The Tokyo CPI acts as a predictor for Japan’s national CPI, which comes out later. Changes in this data can influence the USD/JPY exchange rate, based on how actual numbers align with expectations. A stronger CPI may support the Yen, affecting trading dynamics. The Bank of Japan has historically kept very loose monetary policy to help the economy. However, in 2024, they began to shift away from this approach because inflation rose above their target, along with increasing salary expectations. The January CPI from Tokyo shows inflation easing to 1.5%, indicating that price pressures are not as strong as expected. The core inflation rate, which is closely monitored by the Bank of Japan, has also returned to its target of 2.0%. This suggests that the central bank may not need to raise interest rates in the immediate future. This cooling inflation allows the Bank of Japan to justify pausing its policy normalization. After significant rate hikes starting in 2024 and careful actions through 2025, this new information reduces the chances of another hike in the first quarter of this year. We should expect a slower and more cautious tightening process as we move forward.

The Currency Market Response

The drop in USD/JPY to 153.12 reflects overall weakness in the US Dollar rather than strength in the Yen. Data from the CME FedWatch Tool indicates that the market now sees a greater than 70% chance of a rate cut by the US Federal Reserve by June 2026. This rising expectation is a key factor affecting the dollar. For traders in derivatives, this situation hints that implied volatility in USD/JPY may decrease in the coming weeks. With the Bank of Japan likely to hold steady, there is less chance of sharp currency movements. This makes selling short-dated options, like strangles, an appealing strategy to earn premium from a potentially stable market. Using futures for directional trading is becoming trickier. A less active Bank of Japan usually weakens the Yen, but the trend of a declining US dollar may have a stronger impact. It will be important to monitor the yield difference between US and Japanese government bonds, which has decreased since mid-2025. This will be a crucial factor. Remember how the Yen weakened after the initial policy shift in 2024, due to uncertainty about future rate hikes. Now that Japanese inflation appears under control, the focus is shifting back to the differing policies of a possibly cutting Fed and a steady BoJ. This means the relative policy stance is more significant than just Japan’s policy for the next few weeks. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now