Following two days of consecutive decline, the Japanese yen gained some ground. The currency reacted to stronger-than-expected inflation data as the March Tokyo CPI reached 2.9%, up from 2.8% in February. Tokyo Core CPI increased to 2.4%, surpassing the expected 2.2%, driven by food and service costs. This uptick in inflation has increased expectations that the Bank of Japan (BoJ) may tighten monetary policy sooner to combat persistent inflationary pressures.

Rising inflation and improving economic growth suggest a return to interest rate hikes may be more probable. If the central bank follows through, the yen could benefit from an improved yield differential, supporting its value. However, the yen could remain at risk if domestic consumption fails to keep up with rising prices.

Meanwhile, the looming U.S. tariffs on Japanese car imports pose additional risks to Japan’s economy, particularly its automotive sector. These tariffs could weigh on the yen if they significantly disrupt trade.