Japan's inflation falls to 1.3%, hitting a three-year low amid rising Middle East tensions, while USD/JPY maintains elevated levels

Reuters Finance App — On Tuesday Asian session, the US dollar remains strong against the Japanese yen, trading around 158.55, continuing its recent upward trend. The core driver of this move comes from Japan’s inflation data, which was significantly below expectations, further weakening market confidence in the Bank of Japan’s policy normalization and putting pressure on the yen.

According to data released by Japan’s Statistics Bureau, Japan’s nationwide Consumer Price Index (CPI) for February rose by 1.3% year-over-year, below the previous 1.5%, and hitting the lowest level since March 2022, well below the Bank of Japan’s 2% inflation target. This indicates that Japan’s domestic inflation momentum is continuing to weaken, and the economic recovery remains fragile.

Looking at the sub-components, Japan’s core CPI (excluding fresh food) increased by 1.6% YoY, below the previous 2.0% and market expectations of 1.7%. When further excluding energy prices, the “core core CPI” rose by 2.5% YoY, down from 2.6%. These data collectively point to a trend of broad-based cooling in inflation, not just a short-term effect from falling energy prices.

The immediate impact of weakening inflation is to limit the Bank of Japan’s room for further tightening. In the current environment, the BOJ is more likely to maintain an accommodative stance to support economic growth. This policy expectation gap has reignited interest rate differentials between the dollar and yen, supporting the dollar’s continued rise against the yen.

Meanwhile, external factors also significantly influence the exchange rate. Recent fluctuations in Middle East tensions have heightened concerns over energy supply disruptions. If conflicts persist or escalate, oil prices could rise again, boosting global inflation expectations. In this context, the US dollar, as the world’s primary safe-haven and reserve currency, tends to gain support, while the yen’s traditional safe-haven status is weakened under current interest rate differentials.

It is also worth noting that US President Donald Trump recently announced a five-day window for Iran to make progress in negotiations, but Iran quickly denied these claims and emphasized that conflict would continue. This inconsistency in policy signals increases market uncertainty and favors holding US dollar assets to hedge potential risks.

Additionally, markets will closely watch upcoming US March S&P Global PMI preliminary data. Strong results would reinforce expectations of US economic resilience and support dollar strength; weaker data could disrupt the current upward trend.

Overall, the current forex market logic has shifted from single data-driven to a “inflation + interest rate differential + geopolitical risk” triple driver. With Japan’s inflation continuing to decline, the yen lacks clear short-term rebound momentum, while the dollar remains relatively strong supported by multiple factors.

From a technical perspective, the daily chart shows the dollar/yen remains within an upward channel, trading above moving averages, maintaining a bullish trend. Key resistance is around 159.50; a break above could see the pair testing the 160 level. Support is at around 157.00; a break below might trigger a short-term correction. The RSI remains high but without clear divergence, indicating ongoing bullish momentum.

On the 4-hour chart, the pair shows a consolidating upward structure, with short-term moving averages aligned bullishly. Multiple tests of support at the moving averages suggest stable buying interest. Short-term resistance is at 158.80–159.00; a breakout could open further upside. Support is near 157.80; a break below may lead to technical correction. The MACD remains above zero, indicating a still-bullish trend, though momentum is slightly slowing, warranting caution for potential high-level consolidation.

Summary

In summary, Japan’s persistently low inflation is the core factor driving the yen’s weakness, while geopolitical uncertainties in the Middle East and US economic data expectations reinforce the dollar’s relative strength. In the short term, USD/JPY has upside potential, but as the pair approaches key round numbers, market volatility may increase. Future movements will depend on US economic data releases and whether geopolitical developments lead to substantial changes. Investors should be cautious of potential pullbacks at high levels and monitor interest rate differentials for medium-term trend guidance.

(Edited by: Wang Zhiqiang HF013)

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