JPY: Good advice is expensive, unsolicited advice is free - Commerzbank

At the end of the day, the JPY lost ground against the US Dollar (USD) yesterday as the latter reacted to the high PPI figures. Intraday, however, the JPY gained more than half a percent against the US dollar, while the other G10 currencies were already weakening. What supported the JPY? On Wednesday evening US time, the US Treasury Secretary felt compelled not only to express his opinion on US monetary policy. He also wanted to tell the Bank of Japan how to do its job, Commerzbank's FX analyst Volkmar Baur notes.

Price pressure from inflation should ease significantly

"In a television interview, the Treasury Secretary said that Japan had an inflation problem and that the Bank of Japan was in danger of missing the right moment to raise interest rates further. Attentive readers of this column will already know that I see things somewhat differently. Inflation in Japan is largely attributable to food prices, particularly high rice prices. If you factor this out, inflation remains below 2%. The Fed would probably be quite happy with such a figure. In addition, we are likely to have passed the peak of rice inflation, so price pressure from this source should ease significantly over the coming months."

"This interpretation of the data is, of course, open to debate, and there are certainly analysts who disagree with me. However, I suspect that it was not the US Treasury Secretary's intention to start a discussion about the best monetary policy course for Japan. After all, it is highly unusual for a finance minister to interfere in the monetary policy of its own country, let alone another. However, the market reacted nonetheless. The probability of an interest rate hike in 2025 was estimated yesterday to be around 10 percentage points higher (~64%) than it was the day before. The Japanese yen reacted accordingly. However, it is by no means clear that such a statement by the US finance minister makes an interest rate hike in Japan more likely. The opposite is probably true."

"And that is a problem, especially in view of today's GDP figures, which were significantly better than expected. How can the BoJ now respond with greater confidence regarding an imminent interest rate hike without being suspected of parroting the US Treasury Secretary? The bottom line is that international rules and conventions appear to be changing - and for currencies, this is another source of significant volatility."