Happy friday from Denmark’s capital,

Overnight, Tokyo CPI data showed the headline YoY figure in line with expectations, while the ex-food and energy inflation came in slightly higher than anticipated. Japan’s inflation largely stems from import prices, which have surged due to the recent yen weakness. 

The Fed’s recent recalibration toward a slower path of rate hikes seems to be the only compelling reason for the BoJ to expedite its normalization process. While markets are currently pricing the next BoJ rate hike for June 2025, the widening gap between inflation and the yen suggests it could happen sooner (with inflation creeping faster). BoJ Governor Ueda mentioned this week that they ‘have enough time’ before making another policy decision, signaling a cautious approach. 

Ueda may be hedging future policy action against the outcome of the U.S. presidential election. A Trump victory, with a Republican sweep, could push the dollar higher, providing the ideal conditions for the BoJ to normalize at a faster pace. On the other hand, a Harris win, which would likely be less inflationary, could present a challenge to Ueda’s plans for policy normalization. Tough time to be a central banker right now.

Chart 1.a: Japan CPI YoY vs USDJPY