Japanese inflation not yet at target and the yen is not helping – Forex News Preview
March 22, 2018 5:26 pm
Inflation in Japan has still some way to run to reach the Bank of Japan’s price target and Friday’s consumer prices are likely to prove that once again. The core CPI, the BoJ’s preferred inflation measure, stood at 0.1% when the central bank decided to impose a negative-rate policy at the beginning of 2016 to incentivize banks and businesses to lend money and therefore increase inflationary pressures in the economy. But instead of seeing the core CPI rising at a faster pace, the measure dropped below zero and managed to enter positive territory only a year after, last standing around half the BoJ’s target. Partly to blame is the rising yen which continues to attract demand despite warnings by policymakers that the currency‘s relentless rise works against an export-led recovery.
According to forecasts, Japanese consumer prices which are due at 2330 GMT, might have risen a little bit in February, with the yearly core CPI said to have climbed by 0.1 percentage points to 1.0%. Still, this is far below the BoJ’s target of 2.0% and unless the measure approaches the goal, BoJ policymakers are not expected to significantly alter their ultra-easy monetary policies. Instead, the summary of opinions from the March meeting delivered on Monday expressed that if there is a risk of delay in achieving the target, additional stimulus might be needed.
But the bad news is that as long as the yen keeps appreciating, making imports cheaper and Japanese products expensive to foreigners, inflation could have a hard time approaching the desired level, especially now that political risks appear on the horizon, hurting those whose policies are supportive of a weaker yen. Indeed, the yen has been posting monthly gains versus the greenback since the beginning of the year on the face of several risky events that made investors start looking for safer assets. It was in early January when the yen surged by almost 2.0% over a three-day period in the wake of the news that the BoJ had bought fewer longer-dated government bonds (under its regular asset-purchase operations), increasing speculation that the accommodative monetary policy was getting closer to its end. In February, an unexpected plunge in stock markets triggered by inflation fears and concerns over the twin-deficit in the US were the main supporters of the yen, before Trump’s punitive trade tariffs on steel and aluminum and a number of departures in the White House took the center stage in early March. Last but not least, political conditions in Japan were not favorable either after suspicions that the Japanese Finance Minister was involved in a controversial sale of state-owned land led to a slide in Prime Minister Shinzo Abe’s popularity.
Looking at Japan’s overall economic performance, the economy looks in good shape as it marked eight consecutive quarters of growth at the end of 2017, the longest expansion streak in 28 years, with the unemployment rate dropping to a 24-year low of 2.4% in January. Still, as in other major economies, the subdued pace of wage growth which – in Japan – could be an outcome of the aging population, continues to weigh on household spending, restricting inflationary pressures. The BoJ Governor, Haruhiko Kuroda, speaking recently at the Japanese parliament, said that he expects to achieve his elusive inflation goal by 2019, but latest surveys have shown that analysts doubt this and instead believe that the BoJ will keep its short-term interest rates unchanged at -0.1% and the 10-year government bond yield around 0% until at least the end of 2019. Moreover, they admitted that this year the central bank could play it safe since the government faces two more risks apart from a potential trade pain in the face of Trump’s protectionism. These involve the decision on whether to deliver a tax hike in October 2019 and a ruling party leadership election in September.
Therefore, since inflation remains sensitive to currency exchange markets and risk aversion remains intact in the market atmosphere, providing support to the yen, the way towards the target could be tough.
Looking at the forex markets, better-than-expected readings could send dollar/yen down to the 105.00 psychological level, while if the numbers cause a bigger surprise, the 104.00 could be met as well. On the flip side, if the prints disappoint, the pair could pierce the 106-107 area.
Inflation in Japan has still some way to run to reach the Bank of Japan’s price target and Friday’s consumer prices are likely to prove that once again. The core CPI, the BoJ’s preferred inflation measure, stood at 0.1% when the central bank decided to impose a negative-rate policy at the beginning of 2016 to incentivize banks and businesses to lend money and therefore increase inflationary pressures in the economy. But instead of seeing the core CPI rising at a faster pace, the measure dropped below zero and managed to enter positive territory only a year after, last standing around half the BoJ’s target. Partly to blame is the rising yen which continues to attract demand despite warnings by policymakers that the currency‘s relentless rise works against an export-led recovery.
According to forecasts, Japanese consumer prices which are due at 2330 GMT, might have risen a little bit in February, with the yearly core CPI said to have climbed by 0.1 percentage points to 1.0%. Still, this is far below the BoJ’s target of 2.0% and unless the measure approaches the goal, BoJ policymakers are not expected to significantly alter their ultra-easy monetary policies. Instead, the summary of opinions from the March meeting delivered on Monday expressed that if there is a risk of delay in achieving the target, additional stimulus might be needed.
But the bad news is that as long as the yen keeps appreciating, making imports cheaper and Japanese products expensive to foreigners, inflation could have a hard time approaching the desired level, especially now that political risks appear on the horizon, hurting those whose policies are supportive of a weaker yen. Indeed, the yen has been posting monthly gains versus the greenback since the beginning of the year on the face of several risky events that made investors start looking for safer assets. It was in early January when the yen surged by almost 2.0% over a three-day period in the wake of the news that the BoJ had bought fewer longer-dated government bonds (under its regular asset-purchase operations), increasing speculation that the accommodative monetary policy was getting closer to its end. In February, an unexpected plunge in stock markets triggered by inflation fears and concerns over the twin-deficit in the US were the main supporters of the yen, before Trump’s punitive trade tariffs on steel and aluminum and a number of departures in the White House took the center stage in early March. Last but not least, political conditions in Japan were not favorable either after suspicions that the Japanese Finance Minister was involved in a controversial sale of state-owned land led to a slide in Prime Minister Shinzo Abe’s popularity.
Looking at Japan’s overall economic performance, the economy looks in good shape as it marked eight consecutive quarters of growth at the end of 2017, the longest expansion streak in 28 years, with the unemployment rate dropping to a 24-year low of 2.4% in January. Still, as in other major economies, the subdued pace of wage growth which – in Japan – could be an outcome of the aging population, continues to weigh on household spending, restricting inflationary pressures. The BoJ Governor, Haruhiko Kuroda, speaking recently at the Japanese parliament, said that he expects to achieve his elusive inflation goal by 2019, but latest surveys have shown that analysts doubt this and instead believe that the BoJ will keep its short-term interest rates unchanged at -0.1% and the 10-year government bond yield around 0% until at least the end of 2019. Moreover, they admitted that this year the central bank could play it safe since the government faces two more risks apart from a potential trade pain in the face of Trump’s protectionism. These involve the decision on whether to deliver a tax hike in October 2019 and a ruling party leadership election in September.
Therefore, since inflation remains sensitive to currency exchange markets and risk aversion remains intact in the market atmosphere, providing support to the yen, the way towards the target could be tough.
Looking at the forex markets, better-than-expected readings could send dollar/yen down to the 105.00 psychological level, while if the numbers cause a bigger surprise, the 104.00 could be met as well. On the flip side, if the prints disappoint, the pair could pierce the 106-107 area.
Related Posts: