sustainable inflation

Bank of Japan keeps policy settings unchanged – for now The BoJ has unanimously decided to maintain its ultra-easing monetary policy as it is still looking for clearer signs of sustainable inflation growth. We believe higher-than-expected inflation, a continued solid economic recovery, and growing pressures from the weaker yen will eventually convince the bank to revise its YCC policy in July.   The Bank of Japan's no change decision was very much in line with market expectations The Bank of Japan's (BoJ’s) monetary policy statement hasn’t changed much at all on its view on the growth and inflation outlook and hasn’t given a hint of any exit plans. The BoJ kept its dovish stance by repeating that “the bank will not hesitate to take additional easing measures if necessary”. What is more worth noting, however, is that the BoJ pointed out that wage gains are expected, accompanied by changes in firms’ price and wage-setting behaviour. We believe that this is the change of structural and behavioural disinflation factor that the BoJ has been looking for.   To be precise, the latest labour cash earnings data were disappointing despite the surprisingly solid Shunto (Spring wage negotiations) results. Thus, an improvement in earnings is another factor to watch to gauge the BoJ’s policy action and we will also see how earnings data unfold in the coming months. We believe that rising asset prices are another important factor in sustainable inflation. With recent rallies in Japanese equity markets and the gradual rise in housing prices, the positive wealth effect is likely to keep inflation above the BoJ’s target, in our view.   Dovish comments from Governor Ueda Governor Kazuo Ueda’s comments at the press conference were no different from what the statement suggested. Ueda is concerned that the outlook for wage growth is highly uncertain and wants to see clearer signs of sustainable inflation. There were no hints about future policy adjustments in his comments.   However, we still think that the BoJ can change its YCC policy in July for the following reasons: First, the BoJ is likely to upgrade its inflation forecast in the quarterly outlook report in July. That could more easily justify the BoJ’s policy action. As mentioned previously, we expect inflation to remain higher for longer than expected.   Second, the overall bond market functions have improved, although there have been some fluctuations since December’s YCC band widening, and the market is not testing BoJ’s YCC upper limit of 10Y JGB. Thus, we believe that the market stress has been reduced, and it is a good time for the BoJ to revisit its YCC policy to reflect changes in market conditions.   Third, a weaker yen will likely add more inflationary pressures. If the BoJ continues to maintain its current policy setting, it would risk leaving the BoJ “behind the curve”. We believe that Japan’s economy is recovering solidly compared to other major economies and will continue to outperform in the future. But, if monetary policy fails to reflect this shift of economic fundamentals and the BoJ keeps its dovish policy, then the yen should depreciate even more.Lastly, by the time of the July meeting, the US Federal Reserve will have already decided on monetary policy, and where the UST will be is another factor the BoJ should consider.   From now on, we will be closely watching upcoming data releases such as June Tokyo CPI, labour cash earnings, and the movement in JPY, to see if these give a clearer signal of sustainable inflation.

BoJ Summary of Opinions takes note of higher inflation US job report a mixed bag The Japanese yen has started the week in negative territory. In the European session, USD/JPY is trading at 142.36, up 0.42%. BoJ says monetary easing to continue Inflation continues to be a key issue for the Bank of Japan, although it is much lower than in other major economies, at around 3%. Still, inflation is above the Bank’s 2% target and this continues to raise speculation that the BoJ will have to tighten policy sooner or later. The BoJ has pushed back against talk that it will tighten, and when the central bank recently made its yield curve control (YCC) more flexible, Governor Ueda was careful to stress that the step did not represent a move towards normalization. Against this backdrop, the BoJ released its Summary of Opinions earlier today. The members reiterated the necessity to keep an ultra-easy monetary policy in place, but some members noted that inflation and wages could continue to increase. One opinion went as far as to state that 2% inflation “in a sustainable and stable manner seems to have clearly come in sight” and urged the BoJ to make YCC more flexible. This BoJ internal conversation could be a signal that policy makers are slowly acknowledging that inflation, which has been above the 2% target for months, may be sustainable. That would mark a sea change in the BoJ’s thinking and could have major ramifications on the exchange rate. The US employment report for July was a mix. Nonfarm payrolls were soft at 187,000, despite a banner ADP release which fuelled expectations of a breakout nonfarm payrolls release. Job growth is slowing, but the unemployment rate ticked lower to 3.5% down from 3.6%, and wage growth stayed steady at 4.4%.  

Japan’s core CPI eases in July The decline supports expectations that BoJ will maintain policy USD/JPY has dipped lower on Friday The Japanese yen has extended its gains on Friday. In the North American session, USD/JPY is trading at 145.29, down 0.38%. The month of August has been kind to the US dollar, which has posted strong gains against all of the major currencies. USD/JPY has risen 2.34% in that period and on Thursday, the yen fell as low as 146.56, a nine-month low against the US dollar. The yen has been the worst performer among the majors over the past month, and the currency’s sharp depreciation has raised speculation that Tokyo could respond by intervening in the currency markets. Japan’s Ministry of Finance (MOF) shocked the markets in September 2022 when it intervened and bought billions of dollars with yen, which propped up the Japanese currency. At that time, the yen was also trading around the 146 level, and that has many investors on edge that the MOF may be planning another intervention.   Japan’s core CPI eases in July Japan’s inflation has been hovering above 3% for a prolonged period, higher than the Bank of Japan’s target of 2%. The BoJ has insisted that it will not loosen its ultra-accommodative monetary policy until it has evidence that inflation is sustainable, such as higher wage growth. The markets are not taking the BoJ at its word, as the BoJ keeps its cards very close to the chest in order to surprise the market when it shifts policy. Clearly, transparency is not high on the BoJ’s list, in contrast to the Federal Reserve and other major central banks. Since inflation data could well lead to a shift in policy, every inflation report out of Japan attracts significant attention. The July CPI report, released today, was no exception. Core CPI, which excludes fresh food, eased to 3.1% y/y, matching the consensus estimate and down from 3.3% in June. The indicator is closely watched by the BoJ and the decline supports expectations that the BoJ will maintain its current policy. This, despite the fact that Core CPI has now exceeded the BoJ’s 2% inflation target for 16 consecutive months.   The BoJ is not expected to make any major shifts to policy in the near-term, but that doesn’t necessarily mean that the central bank will stay completely on the sidelines. At the July meeting, the BoJ surprised the markets with a tweak to its monetary policy which provided more flexibility to the 10-year bond yield cap. Governor Ueda insisted that this was not a move towards normalization, but investors have learned the hard way that the BoJ is not hesitant to make policy moves that have blindsided the markets.   USD/JPY Technical USD/JPY is testing support at 145.71. Below, there is support at 144.07 There is resistance at 1.4640 and 147.31  

New inflation methodology offers hope for BoE 1.28 could be major resistance point for GBPUSD A break of 1.26 could be bearish signal   Recent UK economic data has been a mixed bag, with wages rising at a much-accelerated rate but inflation decelerating as expected. While the Bank of England will be relieved at the latter, the former will remain a concern as wage growth even near those levels is not consistent with inflation returning sustainably to target over the medium term. The ONS released new figures overnight that appeared to suggest core inflation is not rising as fast as the CPI data suggests. The reportedly more sophisticated methodology concluded that core prices rose 6.8% last month, down from 7% the previous month and 7.3% the month before. The official reading for July was slightly higher at 6.9% but down from only 7.1% in May. So not only is the new methodology showing core inflation lower last month but the pace of decline is much faster. That will give the BoE hope that price pressures are easing and they’re expected to do so much more over the rest of the year.     GBPUSD Daily     It’s not clear whether this will prove to be a resumption of the uptrend or merely a bearish consolidation. It is currently nearing 1.28, the area around which it has previously run into resistance this month and around the 38.2% Fibonacci retracement level. Another rebound off here could be viewed as another bearish signal, which may suggest we’re currently seeing a bearish consolidation, while a move above could be more promising for the pound. If the pair does rebound lower then the area just above 1.26 will be key, given this is where it has recently seen strong support. It is also where the 55/89-day simple moving average band has continued to support the price in recent months.

BoJ Ueda says 2% inflation target not yet achieved USD/JPY pushes above 149 The Japanese yen is unchanged on Tuesday, trading at 148.85. BOJ’s Ueda says monetary policy to continue The Bank of Japan maintained its policy settings on Friday, which really should not have been all that surprising, given the dovish messages that BoJ Governor Ueda and other BoJ members have been sending out for weeks. The BoJ does not appear to be in any rush to phase out its ultra-loose stimulus, given the weakness in Japan’s economy. Domestic consumption remains weak and the slowdown in the global economy is hurting the critical export sector. BoJ Governor Ueda reiterated this stance on Monday, stating that the 2% target of “stable, sustainable” inflation was not yet in sight. Ueda acknowledged that inflation had exceeded 2% for a “prolonged period”, but that was not enough to indicate that the target of stable and sustainable 2% inflation had been achieved. Ueda added that the BoJ would continue to patiently maintain its monetary stance. Inflation has remained above 2% for close to 1.5 years, but that does not seem sufficient for the BoJ. Earlier today, the BoJ Core CPI index, which is closely monitored by the central bank, remained unchanged at 3.3% in August, above the market consensus of 3.2%.   The yen has paid the price for the BoJ’s insistence on maintaining an ultra-loose policy and has had only one winning week against the dollar since July. The US/Japan rate differential continues to rise as Japanese yields stay put while US Treasury yields continue to move higher. USD/JPY broke above the 149 line on Tuesday and the symbolic 150 level seems very close at hand. Japanese officials have responded with some rhetoric about their concern over the depreciating yen and the threat of intervention is rising as the yen falls lower.   USD/JPY Technical There is resistance at 149.19 and 149.93 USD/JPY tested support at 148.79 earlier. Below, there is support at 148.05    

Strong Tokyo CPI will likely put pressure on the Bank of Japan The Bank of Japan should be concerned about whether 'higher for longer' inflation could hurt the economic recovery.   Headline inflation in Tokyo topped 3% again in three month Tokyo inflation climbed up to 3.3% YoY in October (vs 2.8% in September, market consensus). Upside surprises came from: Higher than expected pick up in utilities with a reduction of government subsidies and A solid rise in entertainment prices. More importantly, the BoJ's preferred measures of inflation, core CPI excluding fresh food (2.7% vs 2.5% in September & market consensus) and core-core CPI excluding fresh food and energy (3.8% vs revised 3.9% in September, 3.7% market consensus) came out higher than market consensus. Since Tokyo inflation is a leading indicator for nationwide inflation, today's readings showed that inflation has been clearly overshooting the BoJ's projections.  On a monthly comparison, CPI soared 0.9% MoM, seasonally adjusted, in October, with both goods and services prices rising by 1.6% and 0.4% each   Tokyo's inflation reaccelerated in October   Utilities and fresh food prices rose the most, but prices of all other major items gained. In particular, the weak JPY has accumulated pressure on the imported goods prices, and this prolonged pressure pushed up prices of household goods, apparel, and transportation. The rise in entertainment is mostly driven by strong demand from foreign and domestic tourists. Going forward, we expect that base effects will kick in and suppress the headline inflation again by the end of the year, but we will likely witness a stickier than expected inflation trend throughout next year.   Overheated inflation is a risk for the recovery Today’s hotter-than-expected Tokyo CPI reading will likely be a warning to the Bank of Japan. It may still rule out a policy change at its October meeting, but at least we expect the BoJ to change its view on inflation. It is clearer that companies are shifting the pressure of rising input costs to consumers, and the weak JPY is partially contributing to the added pressure on input costs. Also, demand-led price hikes continued on the back of a solid recovery in service activity despite a fall in real wage growth. But, if the yen weakens further and brings about overly heated inflation for longer, it will eventually hamper private consumption even before the BoJ's long-awaited goal of sustainable inflation is accomplished, which is the biggest risk for the BoJ. We are sticking to our call that the BoJ will deliver a policy tweak and revise the inflation outlook meaningfully for FY 23 and 24. And today's outcome has slightly increased our confidence in our non-consensus view. There are more details about the BoJ's next moves in our article earlier this week;  Source: CEIC

The Japanese yen is drifting on Friday. In the European session, USD/JPY is trading at 147.80, up 0.10%. Tokyo Core CPI falls to 1.6% Tokyo Core CPI reached a significant milestone today, falling to 1.6% y/y in January, after a December reading of 2.1%. This was the first time the indicator dropped below the Bank of Japan’s 2% target since May 2022. The main driver of the decline was lower energy prices. Tokyo Core CPI excludes fresh food but includes fuel. The Tokyo core-core index, which excludes fresh food and fuel prices, rose 3.1% y/y in January, down from 3.5% in December. The drop in inflation reinforces the BoJ’s view that cost pressures are gradually being replaced by rising service prices as the main driver of inflation. This is hugely significant, as it points to inflation being more sustainable, which is a requirement for the BoJ before it tightens its ultra-loose policy. Japan also released corporate service inflation for December which held steady at 2.4%, a nine-year high. That reading underscores that service prices remain high a companies continue to pass on their costs. BoJ Governor Ueda stated at this week’s policy meeting that progress is being made towards the target of 2% sustainable inflation, and that has the markets speculating that the BoJ could make a major policy shift in April or June. The BoJ wants to see higher wages as evidence that inflation is sustainable and the national wage negotiations in March are expected to provide higher wages for workers.   In the US, the first-estimate GDP for the fourth quarter smashed above expectations, but the US dollar didn’t show much interest. GDP growth rose 3.3% y/y, below the 4.9% gain in the third quarter but well above the consensus estimate of 2.0%. The US economy continues to produce stronger-than-expected data and that has the markets paring expectations for a rate cut in March. The probability of a March cut has fallen to 48%, down sharply from 70% one month ago, according to the CME’s FedWatch tool. . USD/JPY Technical USD/JPY tested support earlier at 147.54. Below, there is support at 146.63 There is resistance at 148.44 and 149.35