Japan’s August inflation data was released today: core CPI rose 1.7% year-on-year and headline CPI 1.9%, both missing market expectations and marking the first slowdown in four months, mainly due to government energy subsidies. The cooling inflation, however, has not shaken the Bank of Japan’s tightening resolve — tomorrow (September 19) the BOJ will announce its rate decision, and markets almost unanimously expect a 25bp hike to 1.25%, which would be the highest rate in 31 years, with possibly two more hikes to follow.

The more intriguing story is the split in market sentiment. Retail investors — the famous “Mrs. Watanabe” crowd — far from retreating, are betting on a weaker yen. The logic is simple: even after a BOJ hike, yen assets still offer limited yield appeal versus U.S. and European bonds, leaving room for carry trades, with household funds continuing to flow into higher-yielding assets overseas. Monetary tightening and capital outflows are happening at the same time, and the “yen doesn’t rise despite hikes” paradox has left many institutions puzzled.

For global markets, Japan is currently the only major central bank still clearly tightening. With the Fed just resuming hikes and the ECB standing pat, the “hike plus quantitative tightening” combination is draining liquidity worldwide. Analysts caution that as policy rates stay elevated across countries, capital scarcity will become a dominant theme in asset pricing, and the value of hedges like gold is being reassessed.