Morgan Stanley warns Tokyo CPI data could trigger a knee-jerk reaction in currency markets on Friday

Economists at Morgan Stanley Mitsubishi UFJ Securities pointed out that Tokyo\’s inflation data may cause a \”knee-jerk reaction\” in the currency market on Friday morning; the data will be released hours before the Bank of Japan makes a policy decision.

Economists Takeshi Yamaguchi and Masayuki Inui wrote in the report that due to the special factor of canceling high school tuition fees in Tokyo, there is a risk of a sharp decline in Tokyo CPI in April.

The Tokyo Metropolitan Government decided to make high school education free and other support measures to take effect in April.

But it is unclear how it will be reflected in Tokyo\’s CPI, making it difficult for economists to make predictions.

A sharp drop in the data due to one-off factors in Tokyo alone is unlikely to change the Bank of Japan\’s policy view, but could reinforce traders\’ views that Japan\’s monetary easing will continue, putting pressure on the yen.

The yen fell below 155 yen against the U.S. dollar overnight for the first time since 1990, triggering expectations that Tokyo will intervene in the market in the coming days.

Japanese officials on Thursday again warned market participants that they were watching currency movements closely.

Economists now predict that Tokyo\’s inflation rate will slow to 2.2% in April from 2.4% last month.

Yamaguchi and Inui said the education cost factor could reduce Tokyo\’s core inflation data by at most 0.7 percentage points, suggesting the result could be well below 2%.

They said the data will be released on Friday morning, the second day of the Bank of Japan\’s monetary policy meeting, so they will be concerned about the risk of a knee-jerk reaction in foreign exchange markets.

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