Why the Yen’s Losing Streak Persists Despite Hot Inflation

The Japanese Yen continues to slide against the US Dollar, even as Japan’s inflation data comes in hotter than expected. The USD/JPY pair has climbed to a three-week high near 146.00, poised for a weekly gain of about 1.2%. This trend raises questions about the forces driving the Yen’s weakness and what lies ahead for both currencies.

Yen Weakness Amid Strong CPI

Japan’s National Consumer Price Index rose 3.5% year-over-year in May, slightly down from April’s 3.6%, while Core CPI, excluding volatile fresh food prices, hit 3.7%—its fastest pace since January 2023. These figures suggest persistent price pressures, yet the Yen remains unmoved, weakening further against the Dollar. Bank of Japan Governor Kazuo Ueda emphasized that rate hikes are likely if the economy stays on track for the 2% inflation target, but cautioned that economic slowdown could temper inflation’s momentum. Despite these signals, markets seem skeptical about rapid policy shifts, keeping the Yen under pressure.

Fed’s Steady Hand Bolsters the Dollar

The US Dollar holds firm, supported by steady US Treasury yields, with the 10-year note reaching 4.43%. The Federal Reserve’s latest Monetary Policy Report underscores a cautious approach, noting persistent inflation and a robust labor market but highlighting uncertainties from recent tariffs. Rates are unchanged for now, with gradual easing possible later this year if data aligns. This measured stance supports the Dollar’s edge over lower-yielding currencies like the Yen, even as mixed US data—like the Philadelphia Fed Manufacturing Index stalling at -4.0 and a contracting employment index—signals challenges in manufacturing and labor markets.

What’s Next for USD/JPY?

The Yen’s struggle reflects a market betting on the Bank of Japan’s cautious normalization versus the Federal Reserve’s steady policy path. Japan’s labor shortages could drive inflation higher, potentially forcing bolder rate hikes, but Ueda’s measured tone suggests no rush. Meanwhile, the Fed’s data-driven approach keeps the Dollar resilient, with yields providing a cushion. For USD/JPY, the near-term bias leans upward unless Japan’s economic momentum shifts or US data weakens significantly. Monitoring Japan’s wage growth and US inflation trends will be key to anticipating the pair’s next move.

The interplay of these dynamics highlights a broader tension: central banks navigating inflation without derailing growth. For now, the Yen’s weakness signals markets expect the status quo to hold, but surprises in either economy could shift the balance.