The release of data on Japan's inflation increase and Kazuo Ueda's speech, the new president of the Japanese Central Bank, caused the dollar-yen pair to fall below the base of the 134th figure during Friday's Asian trading session.

Ueda's controversial messages

Despite the southern momentum, Ueda's inconsistent statements prevented the USD/JPY bears from building on their profits. On the one hand, he asserted that the monetary policy's existing parameters "remain reasonable" and commendable. Ueda did, however, maintain the flexibility for adjustment should inflation continue to show upward dynamics. Such contradictory signals stopped the downward momentum, and the USD/JPY pair thereafter moved back to the 135th figure's margins. Nevertheless, notwithstanding the sellers of the pair's ambiguity, it can be assumed that the Bank of Japan will continue to support the yen over the long term. It is clear that Ueda wants to keep things the same, but his rhetorical style also suggests that he may be open to change in the future.

Speaking before the Japanese parliament, Kazuo Ueda asserted that rising import costs for raw materials, rather than strong consumer demand, are mostly to blame for the country's inflationary acceleration. He also stated that the future of the national economy is "very uncertain."

One of Ueda's words worked in the yen's favor. According to him, the Central Bank may think about normalizing monetary policy if trend inflation "substantially increases" and the Bank of Japan target can be achieved over the long term.

One way to read the expressed phrase is as a warning to the markets to be wary. Nonetheless, Ueda argued that the Central Bank should take its time making the right decisions and that, for the time being, it "should maintain ultra-low interest rates to support a fragile economy."

In other words, Kazuo Ueda made it apparent that he currently does not disagree with the course of action taken by the Bank of Japan's current governor. If adjustments are needed in the future, they will be made gradually, consistently, and smoothly; there won't be any sudden 180-degree turns.

It should be highlighted that Kazuo Ueda still retains the option of normalizing the monetary policy's settings, in contrast to Kuroda. This is a crucial aspect that will come up later (likely in the second half of the year), especially if Japan's inflation rate gains momentum. The current state of affairs is consistent with this scenario, at least as far as Japanese inflation is concerned, as today's announcement eloquently attests.

Report on Japan's rising inflation

The scenario is as follows. The consumer price index as a whole increased by 4.3% in January, which is the fastest pace of growth since December 1981. The 40-year record was also updated by the core CPI, which includes energy prices but excludes fresh food. Excluding food and energy costs, the consumer price index increased by 3.2% from the previous year in October. Nearly every aspect of the aforementioned report performed better than expected in the green zone. It is important to note that for the past ten months, inflation has been higher than the Bank of Japan's target rate of two percent.

According to the release's structure, prices for food, clothing, furniture, and household products all increased in Japan last month, while prices for medical care, education, and transportation services decreased. The price of utilities increased by 15% all at once, with gas and electricity rising by 20% and roughly 25%, respectively.

It is important to note that several major Japanese organizations and businesses have recently started actively raising pay in light of the recently released inflation report. Particularly industry giants like Toyota and Honda. The day before yesterday, representatives of Toyota said that the firm will abide by the union's requests regarding pay and bonuses: wages would increase "at the fastest pace in the last two decades." Honda, a manufacturer of cars, followed suit and declared that it will adhere to all pertinent union obligations. The business announced the biggest pay boost since 1990, a 5% compensation increase.

Conclusions

The inflation report remained obscured by Kazuo Ueda's conflicting signals. Certainly, Japan's inflation is still on the rise, but Haruhiko Kuroda's replacement made it plain that he would not "jump into war" right once after assuming office (i.e. in early April). At the same time, he acknowledged that the Japanese regulator might need to change its normalization strategy, but it is still too early to discuss this in detail. This stance exerted pressure on the yen, which struggled to maintain its position when paired with the dollar.

I believe that the USD/JPY pair will soon follow the dollar, which is anticipating the most significant inflation report regarding the expansion of the underlying PCE index (to be published at the start of the American session on Friday). Making trading decisions on the pair after its publication is thus advised. The key price target in this situation will be 136.50, which corresponds to the upper line of the Bollinger Bands indicator and the upper limit of the Kumo cloud on the D1 timeframe.