Asia FX Talk - JPY outperforms on rising BOJ bets

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Market Highlights

Japan’s inflation accelerated more than expected in January, with CPI excluding fresh food rising 3.2%yoy – the biggest gain since June 2023. This acceleration was slightly faster than economists’ expectation for a 3.1% increase, and was pushed up by higher processed food prices. While there was a mild slowdown in service price inflation, this was largely due to a technical factor that relates to last year’s high base when the ministry changed prices of foreign travel packages. Over the course of this week, there were increasing signs that the Bank of Japan may be more confident of delivering another rate hike. First, Bank of Japan Governor Ueda said he did not discuss rising JGB yields yesterday in a meeting with Japanese Prime minister Shigeru Ishiba. Second, BOJ Board member Hajime Takata said on Wednesday that it’s important to continue considering gradual rate hikes, while also noting that Japan’s bond yields are moving in line with the market’s view of the economy. We continue to see a good chance of JPY outperforming moving forward, notwithstanding tariff risks.

Meanwhile, US stocks declined, even as some Chinese tech stocks continued to do well, on the back of weak forecast from Walmart adding to worries about US consumer strength. Alibaba on the other hand jumped as much as 13% as the Chinese e-commerce company reported sales that beat estimates

Regional FX

Asian currencies traded with a stronger bias with USD/CNH falling to 7.241, with PHP (+0.55%), KRW (+0.5%), and THB (+0.4%) outperforming. A key driver beyond the trends in the Japanese Yen was President Trump’s comments yesterday that it was possible to reach a fresh trade deal with China. While Trump did not describe the parameters of a potential deal, there were previous news and comments that it would also include increasing investments into the US by Chinese companies, even as it’s noted that the first Phase One trade deal was not fulfilled across a range of products with overall compliance only around 60% of total targets. Meanwhile, China’s central bank kept its 1-year and 5-year loan prime rates on hold at 3.1% and 3.6% respectively.

Export activity across the region seems to be slowing down somewhat, with Malaysia’s exports slowing to 0.3%yoy from 16%yoy, and Taiwan’s export orders declining 3%yoy. Nonetheless, we note that it may be too early to tell right now given the distortions driven by frontloading from tariffs, coupled with the Chinese New Year seasonal effects.