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Japan CPI, China Loan Prime Rate

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At the start of next week there are two Far East data points that are important to talk about more from a perspective of technicalities. That is, they aren’t expected to cause an immediate move in the currency markets, but do provide some important insights into where currencies could be going. And that based on certain fiscal and monetary technicalities that can drive markets in certain circumstances.

The economic situation in Asia is particularly complex at the moment, with direct intervention from the two largest governments in the region. The Japanese government is looking to keep the yen from becoming too weak, and the Chinese government has major control over an economy under strain from covid lockdowns. Which is why these sorts of technicalities about government policy can have such a large impact on the currency.

Why inflation isn’t important in Japan

Japan’s CPI is expected to move up to 2.7% from 2.4% prior, but this isn’t expected to impact the market all that much. That’s because there is a unanimous consensus that the BOJ will not change policy at their next meeting later in the week. Even if headline inflation is above target, and despite decades of trying to raise inflation.

That’s because the inflation Japan is experiencing is the “wrong” kind of inflation. It’s not driven by increased monetary circulation from economic growth, but a combination of higher global costs and increased import prices from a weak currency. While raising rates would help reduce some of the impact from inflation, it would come at the cost of hurting an economy that already isn’t very healthy. The BOJ would very much like to keep easing, and use other means to deal with the problem. Such as preventing the yen from weakening too much through government intervention, as explained earlier.

China getting things in order

The Loan Prime Rate is one of the PBOC’s main tools for monetary policy, particularly for supporting the economy. It amounts the interest rate on 1-year and 5-year debt, and sets the interest rates for the financial system. It’s not the same as an interest rate in other countries, since it isn’t applied to government debt, but private loaning. It is a major tool for regulating the cost of credit.

The lower the rate, the more support the government is seeking to supply to the economy. But, it comes at the cost of profitability for the banking sector, which in turn leaves the financial markets a little more vulnerable. The rate is now at a record low level, having just been cut a couple of weeks ago.

What to expect

Yesterday, China’s bureau of statistics said it expected a rebound in low demand. And they also said something that is likely key for future monetary policy action: That core CPI might increase, particularly if the covid situation improves. That means it’s less likely that the Loan Prime Rate will be cut.

The broader implications of that is companies will not have access to lower cost credit in the future. That could mean less importing of machinery from Japan, and commodities from Australia and New Zealand.

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