Japan's core consumer inflation rate, excluding one-off factors, accelerated to 2.8% in April, surpassing the Bank of Japan’s (BoJ) 2% target and rising from 2.5% in March, according to the BoJ's new gauge released on Tuesday [1][2]. The core-core Consumer Price Index (CPI), which also excludes special factors, increased by 2.2% in April compared to a 2.6% rise in March [1][2]. The new index, which strips out institutional factors such as education and energy-related subsidies, showed a much faster year-on-year rise than the 1.4% rate in the benchmark core CPI figure published by the government [1][2].
The release of these inflation figures coincided with notable currency market movements. The AUD/JPY cross lost momentum, trading near 113.85 during the early European session on Tuesday, as the Australian Dollar weakened against the Japanese Yen. This was attributed to a surprise rise in Australia’s unemployment rate to 4.5% in April from 4.3% in March, the highest in about four and a half years, which led traders to reduce bets on further interest rate hikes from the Reserve Bank of Australia (RBA). The probability of a rate increase at the RBA's next meeting dropped to 3%, down from 13% before the employment report, according to Westpac [1].
Additionally, market sentiment was affected by ongoing Middle East uncertainty. Optimism over a potential US-Iran peace deal was dampened by reports of new US military strikes in southern Iran, targeting missile sites and boats attempting to place mines. The US Central Command stated these strikes were conducted in 'self-defense' to protect US troops from threats posed by Iranian forces [1].
In terms of market reaction, the USD/JPY pair was up 0.05% on the day at 159.01 at the time of reporting [2]. The BoJ’s recent policy shift away from ultra-loose monetary policy, prompted by persistent inflation above its target and rising salaries, has influenced the Yen's performance against major currencies [2].
CONCLUSION
Japan's core inflation data exceeded expectations and the BoJ's target, reinforcing the central bank's recent policy shift. Meanwhile, the Australian Dollar weakened against the Yen due to domestic labor market concerns and global geopolitical tensions. Market reactions were moderate, with USD/JPY showing a slight uptick and AUD/JPY losing ground.