USD/JPY looks to reclaim 135.60 on Fed-BOJ policy divergence, Japan inflation in focus

• USD/JPY is marching towards its multi-year high at 135.59 on the continuation of BOJ’s prudent policy.
• Costly fossil fuels and food prices are driving the price pressures in Japan.
• The Fed is expected to get back its inflation rate of 2% in two years.

The USD/JPY pair is displaying a bullish bias in the early Asian session. The asset is advancing to reclaim its fresh multi-year high at 135.59 on divergence in the approach of the Federal Reserve (Fed) and Bank of Japan (BOJ) towards their respective monetary policies.

The BOJ is sticking to its ultra-loose monetary policy while all other central banks have elevated their interest rates vigorously. The Swiss National Bank (SNB) and the BOJ were following a prudent monetary policy despite rising price pressures.  The SNB announced an unexpected rate hike by 50 basis points (bps) on Friday, the BOJ is feeling left out as the central bank continued its accommodative stance in its monetary policy last week to spurt the aggregate demand.

No doubt, the inflationary pressures are advancing in Japan’s economy now as the inflation rate has reached above 2%. And, this week, the market consensus for Japan’s National Consumer Price Index (CPI) is 2.9% against the prior print of 2.5%. While, the National CPI excluding, food and energy may half to 0.4% from the former figure of 0.8%.

Investors should be aware of the fact that an expected reduction in inflation excluding food and energy dictates that price pressures in Japan are significantly contributed by higher food and energy prices. Therefore, the Japanese economy is still deprived of all-around inflation pressures and a spurt in aggregate demand.

On the dollar front, advancing odds of one more 75 bps rate hike announcement by the Federal Reserve (Fed) is strengthening the greenback against the Japanese yen. The US dollar index (DXY) is displaying a lackluster performance despite hawkish commentary from Fed policymakers. Cleveland Fed Bank President Loretta Mester in her interview with CBS News on Sunday dictated that the price pressures won’t get trimmed overnight. It will take two years but will get back to its neutral state.