USD/JPY: Japanese yen forecast as inflation jumps amid the Iran war

The Japanese yen continued softening against the US dollar as energy prices jumped and after the country's publication of its inflation report. The USD/JPY exchange rate rose to 159.7, a few points below the year-to-date high of 160.43.

Japan inflation jumps as crude oil soars

A report released on Friday showed that consumer prices in Japan jumped in March as the US-Iran war continued.

The report revealed that the headline Consumer Price Index (CPI) rose from 1.3% in February to 1.5% in March. Core inflation, which excludes the volatile food and energy prices, rose from 1.6% to 1.8%. 

While Iran’s inflation is much lower than that of the United States and other countries, it is substantially high in Japan’s standards. Historically, Japan has had a long history of having inflation that is below 1%.

Japan’s statistics agency pointed to the higher transport costs, which posted the fastest increase in four months. Household items prices also jumped during the month.

The situation will likely get worse in April as crude oil prices have continued rising this month. Brent, the global benchmark, has jumped to $106 from this month's low of $85. The West Texas Intermediate has also soared to nearly $100.

Japan is now being forced to buy more oil from other places, including in the United States, where exports have soared this month. Historically, Iran has largely depended on crude oil imports from countries in the Middle East.

Therefore, there is a possibility that the Bank of Japan will opt to hike interest rates later this year as the IMF has pushed. The main challenge is that hiking interest rates will affect the economic growth, which is already slowing.

The most recent results showed that the country’s economy expanded by 0.3% QoQ in the fourth quarter. Before that, the economy had contracted by 0.7%. In most cases, hiking interest rates in a slowing economy normally affects its growth.

The Bank of Japan has embraced a more hawkish tone under Kazuo Ueda. For example, it has hiked interest rates from zero in 2024 to 0.75% today, its highest level in three decades.

On the other hand, the Federal Reserve is expected to leave interest rates unchanged in the coming months as inflation has jumped sharply in the past few months. A recent report showed that the headline Consumer Price Index (CPI) jumped to 3.3% in March.

USD/JPY technical analysis 

USD/JPY chart | Source: TradingView 

The daily timeframe chart shows that the USD/JPY pair has drifted upwards in the past few days and is now hovering near its highest level this year.

It has moved above the important resistance level at 159.32, its highest point in January this year. Also, it has formed an inverted head-and-shoulders pattern, a common bullish continuation sign in technical analysis.

The pair has remained above the 50-day and 100-day Exponential Moving Averages (EMA), a sign that the bullish trend is intact.

Therefore, the path of the least resistance for the pair is bullish, with the next key target to watch being the year-to-date high of 160. A move above that price will likely lead to more interventions by the Bank of Japan.