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23 Mar 2016
JPY: Food for thought - ING
James Smith. Economist at ING, notes that the Japanese core inflation, led by food prices, is set to trend downwards over coming months, mounting pressure on the Bank of Japan to expand stimulus.
Key Quotes
“With expectations for further BoJ action in April gradually building, the two sets of inflation data due before the next meeting (tomorrow and on 28th April) will receive, if anything, even greater attention than usual. In February, headline CPI likely moved up to 0.4-0.5% YoY (slightly above the consensus of 0.3%) based on Tokyo data released last month, predominantly on base effects (which will likely reverse next month).
For the BoJ though, what counts is core inflation (excl. fresh food and energy). This measure has been consistently boosted by currency weakness since the introduction of QQE, predominantly via higher imported food prices. But with the last major bout of JPY weakness having occurred in late 2014, core food prices have remained more or less flat for the past few months. Indeed, with JPY around 6% stronger since the start of the year, the pressure on food prices is, if anything, downward.
The absolute effect of this is hard to gauge at this point, as the pass-through to prices depends on various factors, one of which is the persistence of the trend. But the bottom line is that, even if food prices stay at current levels, core inflation will trend downwards this year and could end the year around 0.5%, significantly below the BoJ’s 2% target.
It may be too early to see further evidence of this trend in this release (having fallen from 1.3% to 1.1% YoY last month). But as the trend becomes more established over the coming months, the pressure on the Bank of Japan will undoubtedly increase. This, coupled with the fact that inflation expectations have tumbled and spring wage talks have disappointed (previously flagged as a key risk by Gov. Kuroda), the probability of further easing next month is high.
That said, we think it may still be too early to expect another rate cut at April’s meeting, particularly as recent board member comments suggest more time is needed to assess the policy’s impact. Ultimately, rate cuts are likely to be the go-to policy tool in the long run (with increased JGB purchases impractical from a technical standpoint), but any near-term boost may be delivered through increased purchases of risk assets (most likely ETFs or corporate bonds).”
Key Quotes
“With expectations for further BoJ action in April gradually building, the two sets of inflation data due before the next meeting (tomorrow and on 28th April) will receive, if anything, even greater attention than usual. In February, headline CPI likely moved up to 0.4-0.5% YoY (slightly above the consensus of 0.3%) based on Tokyo data released last month, predominantly on base effects (which will likely reverse next month).
For the BoJ though, what counts is core inflation (excl. fresh food and energy). This measure has been consistently boosted by currency weakness since the introduction of QQE, predominantly via higher imported food prices. But with the last major bout of JPY weakness having occurred in late 2014, core food prices have remained more or less flat for the past few months. Indeed, with JPY around 6% stronger since the start of the year, the pressure on food prices is, if anything, downward.
The absolute effect of this is hard to gauge at this point, as the pass-through to prices depends on various factors, one of which is the persistence of the trend. But the bottom line is that, even if food prices stay at current levels, core inflation will trend downwards this year and could end the year around 0.5%, significantly below the BoJ’s 2% target.
It may be too early to see further evidence of this trend in this release (having fallen from 1.3% to 1.1% YoY last month). But as the trend becomes more established over the coming months, the pressure on the Bank of Japan will undoubtedly increase. This, coupled with the fact that inflation expectations have tumbled and spring wage talks have disappointed (previously flagged as a key risk by Gov. Kuroda), the probability of further easing next month is high.
That said, we think it may still be too early to expect another rate cut at April’s meeting, particularly as recent board member comments suggest more time is needed to assess the policy’s impact. Ultimately, rate cuts are likely to be the go-to policy tool in the long run (with increased JGB purchases impractical from a technical standpoint), but any near-term boost may be delivered through increased purchases of risk assets (most likely ETFs or corporate bonds).”