Morning from Copenhagen.

Overnight, we saw a rather uneventful Bank of Japan (BoJ) meeting, with outcomes largely in line with expectations. Comparing today’s Statement on Monetary Policy to the one released three months ago, it appears the inflation narrative has shifted, placing greater emphasis on financial and foreign exchange markets. Exchange rate movements are now seen as having a more significant impact on prices due to changing corporate behaviors. When we look at the USD/JPY alongside core CPI, it seems to suggest that inflation is likely headed lower.

The BoJ may have recognized that the recent inflation uptick was driven in part by the yen’s substantial depreciation, which caused import prices to soar. Now, with the U.S. Federal Reserve in a rate-cutting cycle and the dollar weakening, the opposite effect is taking place, even as the BoJ attempts to normalize its policy. This raises the question: Is the BoJ’s desire to normalize (by hiking rates) inadvertently reinforcing the yen’s appreciation, accelerating the decline in inflation?

The recent price action in USD/JPY appears driven by the dominance of USD weakness, a phenomenon we’ve labeled as “Powell’s Put” now morphing into “Ueda’s Catastrophe.” Over the past months, USD/JPY has reflected the broader decline in USD strength, with Governor Ueda seemingly using the Fed’s policy outlook and U.S. economic performance as a pretext for maintaining a cautious stance—exactly as we had anticipated. This situation presents a potentially golden opportunity to short USD/JPY once market volatility stabilizes, with fair value considerations and the ongoing trend of USD weakness further supporting this view.

Chart 1a: Will JPY inflation weaken due to FX?