The US dollar has again pushed the Japanese yen above the 115 line, after breaking through the symbolic level on Wednesday.
The US dollar has been showing broad weakness but has managed to push the yen back above the 115 level. Earlier in the day, USD/JPY rose to 115.22, marking a 5-week high. There are two reasons why the yen hasn't been able to take advantage of a weaker dollar. First, the pair is extremely sensitive to the yield differential, and a disappointing seven-year Treasury auction resulted in 10-year yields rising to a 3-week high, boosting USD/JPY. As well, we continue to see elevated risk appetite in the markets despite the explosion in Omicron cases. Governments are scrambling to deal with this newest Covid wave, as hospitals could be overrun by unvaccinated persons becoming infected. The markets, however, continue to rely on reports that Omicron is much less severe than Delta and will not cause the economic damage that we saw with Delta, despite the new all-time highs in cases in the US, France and elsewhere.
Inflation is on the rise in Japan. Although the numbers pale in comparison to those in the US or the UK, this is a significant development, considering that Japan has grappled with deflation for years. Earlier in the week, BoJ Core CPI, the bank's preferred inflation gauge, rose 0.8% in November, its highest level since February 2018. This beat the consensus of 0.5%. The uptick we are seeing in inflation will be welcome news at the Bank of Japan and should ease policy makers' concerns about deflation. The bank's inflation target of 2% remains a long way off, but inflation could move higher if the Omicron wave does not derail economic activity.
The US dollar has been showing broad weakness but has managed to push the yen back above the 115 level. Earlier in the day, USD/JPY rose to 115.22, marking a 5-week high. There are two reasons why the yen hasn't been able to take advantage of a weaker dollar. First, the pair is extremely sensitive to the yield differential, and a disappointing seven-year Treasury auction resulted in 10-year yields rising to a 3-week high, boosting USD/JPY. As well, we continue to see elevated risk appetite in the markets despite the explosion in Omicron cases. Governments are scrambling to deal with this newest Covid wave, as hospitals could be overrun by unvaccinated persons becoming infected. The markets, however, continue to rely on reports that Omicron is much less severe than Delta and will not cause the economic damage that we saw with Delta, despite the new all-time highs in cases in the US, France and elsewhere.
Inflation is on the rise in Japan. Although the numbers pale in comparison to those in the US or the UK, this is a significant development, considering that Japan has grappled with deflation for years. Earlier in the week, BoJ Core CPI, the bank's preferred inflation gauge, rose 0.8% in November, its highest level since February 2018. This beat the consensus of 0.5%. The uptick we are seeing in inflation will be welcome news at the Bank of Japan and should ease policy makers' concerns about deflation. The bank's inflation target of 2% remains a long way off, but inflation could move higher if the Omicron wave does not derail economic activity.