**Japan’s Inflation Overview** Japan’s National Consumer Price Index (CPI) rose by 2.1% year-on-year in December, down from 2.9% the previous month, according to the Japan Statistics Bureau. The National CPI, excluding Fresh Food, also increased by 2.4% in December, matching market expectations, compared to last month’s 3.0%. The CPI, excluding both Fresh Food and Energy, grew by 2.9% year-on-year in December, slightly lower than the 3.0% reported before. Following this inflation data, the USD/JPY currency pair saw a small increase of 0.04%, reaching 158.45. Inflation measures the rise in prices of goods and services, observed both monthly and yearly. Core inflation, which leaves out volatile items like food and fuel, is closely monitored by economists and is targeted by central banks to stay around 2%. The Consumer Price Index (CPI) tracks price changes over time and is crucial for central banks. The Core CPI, excluding food and energy, helps gauge economic health. A rising Core CPI often leads to higher interest rates, affecting currency strength. Conversely, lower inflation may result in reduced interest rates, impacting currencies and investment trends. Recently, higher inflation has boosted currency values due to expected interest rate hikes, attracting global investment. Gold, often considered a safe-haven asset, may see fluctuating demand based on inflation and interest rate trends. High inflation raises the opportunity cost of holding Gold, while lower inflation generally enhances its appeal. **Japanese Inflation Data 2024** Reflecting on inflation data from December 2024, released in January 2025, we noted a drop in price pressures, with the core reading at 2.4%. This marked the start of a significant disinflationary trend that would shape the market for the next twelve months. This cooling trend continued into 2025, with the most recent core CPI for December 2025 dropping to just 1.5%, significantly below the Bank of Japan’s target. As a result, the central bank had to set aside plans for major interest rate hikes during the year. The market had anticipated at least two hikes in 2025, but only one minor adjustment occurred. Thus, the interest rate gap between the US and Japan remained wide, pushing the USD/JPY pair from the 158 level to around 170 now. This indicates that purchasing USD/JPY call options, betting on further increases, could be a key strategy. The momentum is clearly against the yen as long as the Bank of Japan stays inactive. The consistently weak yen has provided a boost for Japan’s export-driven Nikkei 225 index, which surged over 15% last year, surpassing 45,000. Traders should consider using options to gain exposure to further growth in Japanese equities if this currency trend continues. A weak yen translates to higher overseas profits for these companies. **Investment Strategies and Currency Trends** For those trading gold, the landscape is more complicated. While low Japanese interest rates make holding gold appealing in yen terms (XAU/JPY), relatively high global rates result in a higher opportunity cost in dollar terms. This contrast suggests a strategy of going long on gold against the yen while being neutral or bearish on gold against the dollar. Create your live VT Markets account and start trading now.

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