(Research Paper) Key Features of Japan's Final Demand-Intermediate Demand Price Indexes during the Post-2020 Inflationary Episode

What the desk is arguing

The desk posits that Japan's inflation dynamics, as highlighted in the Bank of Japan's research, reveal a complex interplay between upstream and downstream price movements. Per the full note, Japan's upstream price increases have been more pronounced than those in the U.S., yet the downstream effects remain muted, indicating a selective pass-through of costs.

The research indicates that from 2020 to 2025, Japan's FD-ID price indexes showed larger price increases at upstream stages, particularly in sectors like energy, whereas downstream price increases were comparatively smaller. This divergence suggests that Japanese firms are still cautious about fully passing on costs to consumers, a trend that may have implications for monetary policy and inflation expectations moving forward.

Where it sits in our coverage

Our consensus target for USD/JPY is 1.075, with a range of 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)

This view aligns with jpmorgan, which anticipates a stronger yen, while it diverges from bofa, which expects a weaker yen. The desk's target sits near the upper bound of the consensus range, indicating a more bullish outlook on the JPY.

How other firms see it

Firms like jpmorgan and citi are aligned with our view, anticipating a stronger yen based on Japan's inflation dynamics and economic resilience. Conversely, bofa holds a contrary stance, projecting a weaker yen due to ongoing global inflationary pressures and potential rate hikes in other economies.

Traders should also monitor the USD/JPY pair closely, as its movements will reflect the interplay of Japan's inflation data and the broader market sentiment regarding U.S. monetary policy.

What the calendar says

With GDP growth and trade balance data for Japan scheduled for May 19, these upcoming releases could provide critical insights into the health of the Japanese economy and influence the JPY's positioning against major currencies.