Japan's national Consumer Price Index fell in August from 3.1% to 2.7% year-over-year. This slowdown in price growth was, at least in part, due to the reinstatement of government subsidies for electricity and gas. However, the Bank of Japan's preferred measure of core inflation (all items excluding fresh food and energy) also declined—from +3.4% to +3.3%—marking the first drop since July 2024.

A decline in inflation is typically seen as a major factor influencing central bank policy, but in Japan, it's far from the only consideration—in fact, rate expectations have barely changed. Friday's Bank of Japan meeting was uneventful, with BoJ Governor Ueda once again giving no concrete forecasts about when a rate hike might occur.

The primary focus in Japan is on the battle for leadership of the ruling LDP. The election is scheduled for October 4, and only after a winner is known can we expect any policy clarity on rates, as the BoJ largely coordinates its actions with the cabinet.

The main concern still holding back the Bank of Japan from a rate hike is the expectation of a Fed rate cut in parallel, which would lead to an unwanted appreciation of the yen. However, the outlook shifted after Fed Chair Powell was forced on Tuesday to repeat what he'd already said in last Wednesday's press conference (and what the markets ignored)—that the Fed has no intention of lowering rates automatically in line with a predetermined plan; the September 17 rate cut was a one-off decision and any further action will depend on inflation data. If inflation starts rising again, the Fed will not cut rates further.

The market finally heard what Powell was trying to communicate, and the dollar strengthened sharply on Wednesday.

The net long position on the yen shrank by $2.53 billion over the reporting week to $5.24 billion; the estimated price remains close to the long-term average, and uncertainty is high.

Falling inflation and Powell's hawkish comments on Tuesday have notably weakened the yen's position, and now a move toward 145.50 no longer appears to be the most likely scenario. USD/JPY may well reach the nearest resistance at 150.90 in the short term.