JPY: Inflation pressures ease further in Japan – MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that the main economic data release overnight was the latest CPI report from Japan for July although it has had no impact on the performance of the yen.

Key Quotes

“The report revealed that underlying inflation pressures continued to ease further. The BoJ’s preferred core inflation measure excluding fresh food and energy slowed to an annual rate of 0.5% in July from 0.7% in June and moving further below the peak of 1.3% recorded at the end of last year. The downward momentum is reinforcing scepticism over whether the BoJ will be successful at returning inflation to their 2.0% target during fiscal year 2017. It has now fallen below its average over the last three years of 0.7% although it still remains above rates which prevailed prior to the introduction of Abenomics when it averaged -0.5% in 2012. The sharp strengthening of the yen is contributing to softer inflation pressures and increasing pressure on the BoJ to deliver further easing.          

In an interview at Jackson Hole, Dallas Fed President Kaplan stated that the “jury is out” on whether the BoJ’s negative rate policy is working which might “buy them time” but warned that they are “not a substitute” for structural reforms”. He acknowledged that Japanese officials are “painfully aware” that structural reforms are not easy. He believes that the sharp strengthening of the yen since the BoJ introduced negative rates has provided a lesson that negative rates have side effects and may not achieve their intended objectives which requires a broader range of policy tools than just monetary policy. Managing an exchange rate was described as a “very difficult”.

Bloomberg has also run an interesting report overnight examining the effectiveness of BoJ policy easing. The report highlights a model created by RBNZ researcher Leo Krippner to estimate the shadow policy rate in Japan which is used to better measure the impact of unconventional easing policies.

According to Krippner’s model the shadow policy rate in Japan is currently estimated at -4.65%. In comparison the shadow policy rate in euro-zone has declined more rapidly and by more to a current estimate of -6.64%. RBNZ researcher Krippner states that the shadow rate in Japan “is consistent with the adoption of easing measures such as QQE and subsequent additions, but not yet generating the 2% inflation target announced on the outset of the policy”. However, he noted that influencing the interest rate is not the only option available which the BoJ is already doing by purchasing ETFs and REITs which wouldn’t necessarily show up in the shadow rate. Overall, the report implies that BoJ easing proving less effective than the ECB’s measures.”