EUR/JPY corrects to near 142.50 ahead of Japan’s Inflation

• EUR/JPY has dropped to near 142.50 despite ECB’s Lagarde refreshed fears of higher Eurozone inflation.
• The recent increase in financial market risks has made it more difficult for central banks to fight inflation.
• A major contribution to Japan’s inflation is coming from higher import prices.

The EUR/JPY pair has extended its correction to near 142.50 in the early Tokyo session. The cross has dropped further as investors are shifting their focus toward the release of Japan’s National Consumer Price Index (CPI) data, which will release on Friday.

According to the consensus, annual headline CPI is expected to decline to 4.1% from the former release of 4.3%. While the core CPI that strips off oil and food prices is seen higher at 3.4% against the prior release of 3.2%.

Bank of Japan (BoJ) policymakers have been worried that the major contribution to Japan’s inflation is coming from higher import prices while the impact of domestic forces is absent. A Reuters Tankan survey showed that “Big Japanese manufacturers remained pessimistic about business conditions for a third straight month in March.” The sentiment index for big manufacturers stood at minus 3, slightly up from minus 5 seen in the previous month.

Meanwhile, European Central Bank (ECB) President Christine Lagarde has refreshed fears of higher inflation in the Eurozone citing "Inflation is still high and uncertainty around its path ahead has increased." The commentary got more strength after Reuters reported, “The recent increase in financial market risks has made it more difficult for central banks to fight inflation,” the five “wise ones” who advise Berlin on economic policy said in their biannual report.

Wage growth and a recent revival in energy costs have been major drivers of persistent Eurozone inflation. And the cost-push inflation measures will continue to keep Eurozone inflation at elevated levels. Investors should brace for the continuation of bigger rate hikes from the ECB to tame the stubborn inflation ahead.