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Japan April Inflation: Enough for Another Hike?

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Japan April Inflation: Enough for Another Hike?

There are mixed feelings in the market about tomorrow’s Japanese CPI figures, given the unusual situation for the yen. Normally, traders look at inflation figures to see what the central bank will do. But the extreme weakness of the yen coupled with a sputtering economy has put the BOJ in an awkward position. That means the market reaction could be somewhat abnormal.

As inflation is expected to once again come in above expectations, it has been reported that the BOJ is considering de-emphasizing inflation from its rulebook. That would allow for monetary policy to focus more on generating stable economic growth (which in theory leads to stable inflation). The market, it seems, is still convinced that the BOJ won’t go through with any serious tightening as the USDJPY has trended higher through the course of the week.

Pushing the Boundaries

Yesterday, the yield on the benchmark 10-year Japanese government bond (JGB) ticked up to 0.993%, the highest it has been in 12 years. It’s just shy of passing over the psychologically important 1.0% level, which would be expected to test the BOJ’s resolve in keeping interest rates for the market low.

Meanwhile, a survey of major Japanese firms showed that almost half of Japanese businesses see the yen weakening beyond the 155 handle as harmful for their activities. One third of them want the BOJ to hike rates in order to protect the yen. This is important, because one of the chief advantages for a weaker yen is that it would help the export-oriented economy. But, that comes at a cost of higher import prices, which is filtering through to higher inflation.

What the Data Suggests

The consensus among analysts is that Japan April Inflation will subside a bit, but still come in above target at 2.3% compared to 2.7%. But the recent PMI data shows that the economy remains active, and the price pressure could keep picking up. The so-called “core-core” rate (which is roughly equivalent to the “core” rate in other countries) is seen even higher at 2.6%, down from 2.9% prior.

The persistently high inflation rate has led to low-level, albeit persistent, rumors that the BOJ could hike again. Some say as soon as the next meeting, since further tightening hasn’t been ruled out, strictly speaking. The BOJ’s unusual communication style means that a somewhat “surprise” move like that is certainly possible. That might explain the slowly rising JGB yields, even as the market weakens the yen expecting the carry trade to remain in place for quite some time to come.

Holding On Through the Summer

But it’s not all bad news for the BOJ. April’s trade data showed a large increase in the deficit, as the general currency flows reversed. Foreign traders might be becoming wary of potential moves to prevent further sliding in the exchange rate, and appear to be holding back with the large cash moves. A lighter volume of trading would then help the BOJ if it decides it needs to intervene again.

The main hope for adjusting the exchange rate still remains on closing the interest rate gap with the US. As the Fed would start easing later in the year, this would happen organically. The thought among Japanese officials might still be to hold on until September, regardless of what the inflation figures actually say.

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