The USDJPY has tracked back up almost towards levels seen at the end of April when the government intervened to push it down. As the market grows more hawkish on the Fed, traders are getting more bold in predicting a weaker yen, reviving the potential for carry trades. The question is whether the BOJ can keep the pair from making another attempt to break above 160, or has it finally run out of ammunition.
To stoke the fire, yields on Japanese bonds are rising to highs not seen since before the start of the century. Investors are growing concerned with high levels of government spending with a sluggish economy that could throw its ability to service the debt into disarray. Add to that higher energy prices, it might just put the BOJ on track to hike in June, even if that risks the country’s financial system.
What’s the Forecast for Japan’s April Inflation?
The consensus among analysts for April Japan CPI coming out on Friday is that the headline rate will rise to 1.8% from 1.5% a month earlier. Meanwhile, the core rate is anticipated to rise to 2.0% from 1.8% prior, in line with the BOJ’s target.
Compared to other currencies, this inflation rate seems fairly benign. The problem for the BOJ, however, is that sluggish growth has meant a lack of organic inflation has reasserted itself over the last couple of years. This had been a recurring problem for financial policymakers for decades, as Japanese people were not spending enough to support economic growth. Therefore, the comparatively soft inflation number is a bigger concern, because it’s rising from a lower base level.
Inflation Pressures Keep Mounting
Wednesday’s release of PMI figures offered some interesting clues about what’s going to happen with inflation, but also the BOJ’s difficulty in dealing with it. Manufacturing remained robust, but the services sector entered stagnation for the first time in over a year. The survey noted a dramatic drop in overseas sales for Japanese services, indicating less demand for the currency.
Additionally, the report noted the largest uptick in prices since the data series started 19 years ago. The report highlighted growing backlogs as companies were facing a shortage of raw materials, another indicator that prices would likely continue to rise. Manufacturers would have to increase prices to secure supplies, and then pass that cost on to consumers.
Time to Pull the Trigger on A Hike?
The PMI data suggests that there is a likely chance that the upcoming CPI figures could exceed expectations. This would raise pressure on the BOJ to do something about inflation and the weaker currency. Earlier in the week, Q1 GDP was hotter than anticipated, giving room for the BOJ to tighten policy. However, the drop in service generation suggests that the Japanese economy is vulnerable, and could be seen by doves as a reason to be particularly cautious about hiking.
Notably, hawkish BOJ Member Junko Koeda argued for raising rates as soon as the next meeting, citing a resilient economy. His comments suggest that the BOJ is worried about inflation, but the biggest factor in the decision on whether to raise rates is economic growth. If the economy remains bullish, then the BOJ might feel confident it will resist a rate hike.
