Higher US inflation expectations widen yield gap, pressuring the yen

A stronger US dollar is pushing the yen lower, with USD/JPY nearing 159.30, as inflation data points to a persistent heat in the American economy. The market expects US headline CPI to jump to 3.3% year-over-year in March, up from 2.4% in February, with core inflation projected at 2.7% versus 2.5% prior. That reading, driven in part by surging oil prices amid Middle East tensions, strengthens expectations that the Federal Reserve will maintain elevated interest rates for longer. The prospect of a higher-for-longer rate stance widens the policy gap between the Fed and the Bank of Japan, which has only begun to unwind its ultra-loose monetary policy after years of divergence. As a result, the yield spread between US and Japanese 10-year bonds has expanded, drawing capital toward higher-yielding US assets. Demand for the dollar intensifies, further pressuring the yen. The Japanese government, facing rising import costs from the weaker currency and regional supply disruptions, is preparing to release approximately 20 days' worth of additional oil reserves starting in early May to stabilize domestic energy prices.