Tokyo CPI: an early read on Japanese inflation and the yen

[Fairman]

Tokyo CPI: an early read on Japanese inflation and the yen

Tokyo CPI comes out a few weeks before the national figure, and it's often treated as a preview of where national inflation is heading. Over the past few years, as Japanese inflation became a bigger topic, it started getting more attention from yen traders.

It's released in the Asian morning, usually late in the week. The reaction in USDJPY depends heavily on what the market thinks the BoJ will do next. If the BoJ is seen as close to a policy change, a strong Tokyo CPI can push the yen higher. If the BoJ is seen as firmly on hold, the release might barely matter.

The core measures, excluding fresh food or fresh food and energy, are what the BoJ focuses on. The headline can be distorted by energy subsidies and food prices.

For European traders, it's mostly something to check before the London session. If the yen moved a lot on the release, it's useful context for USDJPY and the yen crosses in the morning. If it didn't move, it's one less thing to think about.

I'd also watch for Japanese officials commenting on the yen around the same time, since they sometimes do so on data days. That can have a bigger effect than the data itself.

[Fairman]

US yields often matter more than Japanese data for USDJPY, even on Tokyo CPI days. If US yields are moving sharply, the yen can follow them and ignore a Japanese data surprise. Checking what US Treasuries did overnight helps explain the USDJPY move. If yields were flat and USDJPY moved on the release, the data probably drove it. If yields moved a lot at the same time, the data might have been a minor factor. It's a simple check that avoids misreading the reaction. So on those days I look at the US ten year yield before reading too much into the Tokyo number itself.

[Fairman]

Japanese data releases happen at 08:30 Tokyo time, which is the early hours of the morning in Europe. A lot of European traders never see them live. If you trade yen pairs in London, a quick look at the overnight calendar and the Asian session chart before the open is a good habit. It takes a minute, and it tells you whether the yen is starting the day with momentum from a data surprise or quiet. That changes how you might read the first hour of London. For anyone in Europe, the morning chart already shows how the yen reacted, and that reaction is often more useful than the headline figure.

[FXS Prop Desk]

Tokyo CPI has become more important as Japanese inflation has risen. A strong number can increase expectations for BoJ action and move the yen.

The release is usually in the Asian morning, so European traders see the reaction before they start. A large move can set up yen trades for the European session, especially if the national CPI or a BoJ meeting is coming soon.

[Fairman]

Core measures matter for Tokyo CPI as well. The Bank of Japan pays attention to inflation excluding fresh food, and sometimes excluding both fresh food and energy. Government subsidies on energy or utilities can push the headline around for reasons that have nothing to do with underlying inflation. If Tokyo CPI moves mainly because a subsidy was added or removed, the market might discount it. Reading the breakdown, or at least the core figure, before reacting to the headline helps avoid trading a number that won't change policy views. The statistics bureau's release notes usually mention any subsidy effects.

[Fairman]

Does Tokyo CPI move the yen crosses differently from USDJPY? If the yen reacts to the data, it should move against all currencies, so EURJPY, GBPJPY and AUDJPY should all shift in the same direction. If only USDJPY moves, something else, like US yields or dollar news, is probably driving it. Checking two or three yen crosses alongside USDJPY right after the release is a quick way to see whether the market actually cares about the number or is just carrying on with whatever it was already doing. It takes a few seconds and saves a lot of second guessing.