The current week is a series of holidays or semi-holidays: Christmas Eve, Christmas Day, Boxing Day, and St. Stephen's Day. The FX market continues to trade amid low liquidity, especially in the second half of the week, when an information vacuum has formed. In this respect, Japan is virtually the only source of news, playing a kind of role as a news provider and exerting a corresponding influence on the yen.
During Friday's Asian trading session, Japan published data on inflation growth in Tokyo for December of this year. It became known that the consumer price index in the Japanese capital slowed sharply this month—to 2.0%, after declining to 2.7% in November. The indicator has been falling for the second month in a row and hit a yearly low in December. The index was below the 2% level in October 2024. Core Tokyo CPI, excluding fresh food prices, also came out in the red, declining to 2.3% versus a forecast of a slowdown to 2.5% (from the previous 2.8%). This is a multi-month low—the lowest reading since February of this year. Tokyo CPI excluding fresh food and fuel prices also showed a slowdown in December—to 2.6% (2.8% in November).
As is well known, Tokyo inflation is considered a "harbinger" of nationwide inflation in Japan. First, the Tokyo CPI is released about 3–4 weeks earlier than the nationwide CPI. Second, the indicator is highly representative, as Tokyo is the country's largest metropolitan area with a high share of consumption in services, rent, transport, and food (categories that often reflect changes in price pressures first). Third, there is historical correlation: in most cases, the direction of Tokyo CPI (acceleration or deceleration) later matches what happens at the national level. Therefore, the Bank of Japan and analysts use this indicator when forming expectations for interest rates and inflation.
Of course, TCPI is not a "perfect predictor with pinpoint accuracy." Regional differences must be taken into account—municipal subsidies, housing rents, and utility tariffs can differ from those in Tokyo (sometimes quite significantly). For example, temporary electricity/gas subsidies sometimes have a stronger impact on the capital than on other prefectures.
Nevertheless, Tokyo CPI predicts the direction of the "senior" indicator fairly accurately: if inflation in Japan's capital slows or accelerates, there is a high probability that nationwide inflation will follow suit. That is why USD/JPY traders quite reasonably interpreted today's report as unfavorable for the yen.
What does the release indicate? First of all, that inflation in Tokyo cooled more than economists expected, reflecting an overall easing of price pressures in the economy. The structure of the report suggests that the decline in TCPI was driven mainly by falling energy prices and more moderate growth in food and utility prices.
On the one hand, despite the downward dynamics of key TCPI indicators, core inflation remains above the Bank of Japan's 2% target. Theoretically, this leaves room for continued monetary tightening. On the other hand, the pace of the decline in Tokyo inflation turned out to be much stronger than expected, and this fact cannot be ignored.
It is worth recalling that following its December meeting, the Bank of Japan raised the policy rate to 0.75% (the highest level in the past 30 years) and signaled readiness for further steps in this direction "if wage growth and economic conditions support it."
At the same time, today's TCPI report strengthens the case for a wait-and-see stance by the Bank of Japan, at least in the context of the January and March meetings. At the same time, the release does not completely close the door to monetary tightening. Now the focus of both the central bank and the market will naturally shift to wages. In fact, wages are currently the main "missing element" in the BoJ's argumentation.
By and large, TCPI has eased the pressure on the Bank of Japan, freeing it from the need to act or react "right here and now." At the same time, the report has increased the importance of wage data as the next decisive factor.
It should be noted that winter wage statistics will be viewed by the Bank of Japan as auxiliary and subject to seasonal distortions. The key factor for assessing the sustainability of inflation (and the central bank's next steps) will be the spring wage negotiations (Shunto). Until then, the central bank is likely to maintain a wait-and-see stance.
Thus, Tokyo inflation turned out to be unfavorable for the yen, allowing USD/JPY buyers to stage a corrective rebound after a three-day prolonged decline (caused by the general weakening of the U.S. dollar). However, considering long positions in the pair makes sense only if it breaks above the resistance level at 156.70 (the Kijun-sen line on the four-hour chart). In that case, the pair will not only be above all Bollinger Bands lines on the H4 timeframe, but also above all Ichimoku lines, which would form a bullish "Parade of Lines" signal. The upward targets are 157.10 and 157.40 (the upper Bollinger Bands on the H4 and D1 timeframes, respectively).