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Japan's first inflation undershoot in 2 years?

People enjoy drinks and food at izakaya pub restaurants at the Ameyoko shopping district, in Tokyo

By Jamie McGeever

(Reuters) - A look at the day ahead in Asian markets.

Japanese inflation figures could provide the biggest market fireworks in Asia on Tuesday, potentially pushing the yen to a new 2024 low, closer to its recent three-decade depths, and into territory likely to spark louder warnings from Tokyo.

Asian markets have started the week on a more cautious footing following the tech-fueled buying frenzy of last week - the MSCI Asia ex-Japan index had its biggest fall in over two weeks, and a 1% decline in Chinese stocks snapped their longest winning streak in six years.

Tuesday's economic calendar is light, with current account data from Taiwan and Hong Kong trade figures overshadowed by January consumer inflation numbers from Japan.

Inflation is expected to have fallen below the Bank of Japan's 2% target for the first time in nearly two years, according to a Reuters poll, with annual core inflation seen slowing to 1.8% from 2.3%.

Headline inflation should also ease from December's 2.6% pace.

This could further complicate the BOJ's policy normalization plans, after figures earlier this month showed the economy unexpectedly fell into a recession at the end of last year. A below-consensus reading could be particularly problematic.

Some economists think the BOJ could end years of ultra-loose policy and raise interest rates as soon as next month. But that might be hard for the BOJ to deliver and communicate with inflation below target and the economy in recession.

Little wonder, perhaps, that the yen remains under heavy selling pressure. While the dollar is struggling against a major currencies on an index basis, it is pushing new highs for the year against the yen just under 151.00 yen.

U.S. Commodity Futures Trading Commission data show that speculators increased their net short yen position - effectively a bet that the currency will depreciate - to the largest since November and the second biggest in six years.

There are reasons to believe Japanese authorities may be less willing to conduct yen-buying intervention to support the currency like they did in 2022, but stretched positioning among hedge funds and speculators will almost certainly be a red flag.

FX traders don't seem to be too concerned though - three-month dollar/yen implied volatility is its lowest in almost two years.

In China, meanwhile, official figures on Monday showed that Chinese banks purchased the most dollars from their clients via FX swaps in January, suggesting exporters preferred to only temporarily acquire the local currency while holding on to dollars.

State media also reported that President Xi Jinping held a meeting of a key economic policy body on Friday, the Central Financial and Economic Affairs Commission, to discuss providing support to manufacturers and lowering logistics costs.

Here are key developments that could provide more direction to markets on Tuesday:

- Japan inflation (January)

- Hong Kong trade (January)

- Taiwan exports (January), current account (Q4)

(By Jamie McGeever)