Pressure Builds on the Bank of Japan
Rising inflation is pushing the Bank of Japan toward another increase in borrowing costs, though soft factory output gives policymakers a reason to hold off. Expensive oil and a weak yen are lifting import bills and squeezing household budgets. Attention now turns to Japan's inflation report on October 23 and the central bank's meeting on October 29-30, with a pause in October still leaving room for a move in December.[S1][S2]
In a speech, Deputy Governor Shinichi Uchida described the economy as continuing a moderate recovery. He pointed to strong global appetite for artificial intelligence supporting exports, while healthy corporate earnings underpinned investment. Household spending held up as employment and income conditions improved, which the deputy governor suggested gives the central bank room to lift rates without sharply denting demand.[S1]
The same remarks cautioned that companies keep passing on higher input and wage costs to consumers. Uchida indicated that underlying inflation was nearing 2% and that financial conditions stayed accommodative following September's rate increase. According to the account, the BOJ is now more concerned that price growth could accelerate further.[S1]
The International Monetary Fund echoed that concern in an interview reported on October 17. Krishna Srinivasan, the fund's Asia and Pacific director, said the BOJ may need to tighten faster should inflation overshoot expectations. Costlier energy adds to that risk.[S1]
Oil, the Yen and Outside Scrutiny
Brent crude approached the $110 mark last week. For Japan, costly oil combined with a weak yen raises import expenses and can erode both household spending and corporate margins, making the right pace of tightening harder to gauge.[S1]
US Treasury Undersecretary Erin Browne argued that Japan's monetary policy and currency ought to reflect the move away from deflation. She also cautioned that abrupt currency swings could prompt investors to unwind positions and push up financing costs, comments that sharpen scrutiny of yen weakness.[S1]
Inflation and Output Pull in Opposite Directions
Core inflation in Tokyo climbed to 2.7% in September from 1.8% in August, a sharp jump that gives the BOJ fresh reason to monitor price pressures. National core inflation is also expected to rise, and the figures due on October 23 could strengthen the case for another hike if the increase is confirmed.[S1]
Activity data suggest the central bank may still proceed slowly. Core machinery orders rose 5.2% in August from the prior month, beating a forecast of 3% and reversing July's 3.7% decline. Yet revised industrial production fell 2.4% in August, worse than the initial estimate of a 1.7% drop. Solid orders signal firmer equipment demand, while weaker output shows manufacturers remain under strain, giving the BOJ reason to see whether investment translates into stronger production before acting again.[S1]
What to Watch in the Yen Pairs
A gap of more than 2% between US and Japanese 10-year yields still favors dollar assets, though the dollar retreated on Friday toward support at 101.80. A further fall in US yields or an earlier BOJ signal could weaken dollar-yen, while an October pause and renewed expectations of Federal Reserve tightening could support the pair.[S1]
Technically, dollar-yen rebounded strongly in September from long-term support at 153, a level marked by an ascending broadening wedge running from the April 2025 lows. The pair has approached resistance around 160; holding above 159 would point toward 160, while slipping below 157 would likely open the 154-155 range. The 159 level stands out as near-term resistance, with price consolidating around the 50-day and 200-day moving averages for three weeks. A break above 159 would likely clear the 200-day average, while a drop below 157 would take it under the 50-day line. Losing 154 would expose the 152-152.50 zone, though the RSI remains above its midline.[S1]
For euro-yen, expectations of another ECB rate increase in December lend the euro some support, though Christine Lagarde has said high borrowing costs would slow growth and ease inflation pressure, possibly reducing the need for further tightening. A BOJ pause in October could sustain near-term support for the pair, while clear signals of faster Japanese hikes would narrow the euro's expected rate advantage. The pair has reached strong support near 175 and is consolidating, with last week's rebound offering no meaningful recovery and bearish pressure persisting.[S1]
