Yen flops despite upbeat Japan CPI data

The yen fell on Friday after Japanese data showing core inflation picking up to the fastest since March 1998 did nothing to shake expectations the yen would stay a low-yielding currency for a while yet.
Japan's core consumer price index rose 0.5 percent in January from a year earlier, beating forecasts and giving the clearest sign yet that the economy is finally escaping nearly a decade of deflation.
Armed with the data, the Bank of Japan is expected to scrap its super-loose "quantitative easing" policy, possibly as soon as its policy meeting ending next Thursday. But even after such a move overnight rates are seen holding close to zero.
"What's going to change after the BoJ ends the quantitative policy?" said Fumihiko Kawano, forex manager at Nomura Securities. "Unless Japan's bank deposits start to pay interest rates of like 1.5 percent, Japanese investors will keep buying foreign currencies."
The BoJ is expected to start phasing out its current policy of flooding the banking system with excess reserves in a step-by-step process while holding the overnight call rate at virtually zero during the process.
In a Reuters poll of 31 market players taken after the CPI data, about half of them expect a BoJ policy shift next week. The rest of them expect a move in April, partly because some government officials remain unimpressed by the CPI data.
Japan's top government spokesman, Shinzo Abe, said on Friday that deflation was showing signs of abating but had not yet ended.
Most market players expect the BoJ to eventually raise overnight interest rates to 0.25 percent by year-end. But beyond that investors are unsure how much higher the central bank will push up rates, which have been held below 0.5 percent for more than a decade.
"The end of quantitative easing is not positive for the yen at all, and the market is likely to find out in coming weeks time after having already bought the yen," said Toru Umemoto, chief forex strategist for Japan at Barclays Capital.
The dollar had gained around 0.5 percent on the day to 116.35 yen, rebounding sharply from a low of 115.56 yen struck on electronic trading platform EBS immediately after the CPI data.
The euro strengthened to 139.90 yen after touching a low near 139.15 yen early in the session.