Yen Edges Higher on Fed Rate Bets, Soft GDP Miss Overlooked

The GDP deflator held at 2.6% year on year in the second quarter, comfortably above the Bank of Japan's 2% target. That, analysts said, makes it unlikely the soft headline numbers will derail the BOJ's expected rate hike in September. Capital Economics characterised the details as a mixed bag, noting that the government has limited pass-through from higher energy costs while a jump in government consumption suggests Prime Minister Takaichi's expansionary fiscal policies are starting to take effect.

Currency markets focused more on the US rate outlook than on the Japanese data, traders said. The repricing of Fed expectations has done more to narrow the yield gap between the two economies than Monday's GDP report. The BOJ is still seen leaning toward further tightening, according to analysts, given inflation remains well above target. That policy divergence between a cautious Fed and a still-hawkish BOJ is the dominant driver of yen direction, traders said. The next BOJ meeting is scheduled for September 20.