Japan's Inflation comes in lower than expected

Japan’s Central Bank meeting is scheduled for next 28 Jul, Friday (Thursday night for the US). While there was some chatter earlier this month on whether Japan will start to reverse it’s monetary policy easing, much of those rumors have been put to recent by another recent talk by Governor Ueda. Hiking strengthening currency which will mean again that imports will be cheaper and therefore move inflation back down to 0%.

We just got inflation numbers from Japan today that came in lower than expected on both the headline and core level. The BoJ forecast for inflation at the core level, which is CPI excluding fresh food is 1.8% and Core Core Inflation which is CPI excluding Fresh Food and Energy is 2.5%.

While headline inflation actually increased from 3.2% to 3.3% in June. Core Core Inflation came in lower at 4.2%. But, the BoJ continues to see underlying inflation much lower than expected.

Most of Japan’s inflation comes from the cost-push factors, i.e., input costs increasing because of a weaker JPY. At the recent Sintra conference, Governor Ueda discussed that they don’t inflation close to their 2% goal.

Japan’s inflation may have peaked with this reading but, it’s unlikely that we will see a change to overall policy. There’s some discussion on a mild tweak in the YCC strategy but, traders are seeing even that as unlikely at this stage.

Finally, the BoJ is most concerned about a stable inflation rate fueled by consumption and spending, instead of increasing costs. To that end, they want to see increases in real wages and household spending.

Earlier this month, we received data that Japan’s real wages remained negative for the 14th straight month, improving slightly to -1.2% YoY. However, household spending feel for the 4th month, falling 4.0% YoY in May vs an expected 2.5% decline and 4.4% drop in April.

These numbers don’t support an immediate revision in policy as the BoJ has telegraphed.

What everyone will be looking out for during this meeting however, is a possible revision to forecasts that are released with this meeting.

Market Update

The JPY has given up some of its strength in the last few days. The USD-JPY hit support at around 137 and is now reversing. It could hit at area of resistance at 142.

The Nikkei 225 has been chopping sideways and we likely need to see a close above 33100 for the index to gather momentum.