JPY: Inflation to recover gradually supported by weaker yen - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the yen continued to weaken in the Asian trading session lifting USD/JPY closer to the 114.00-level although it has since fallen back towards the 113.00-level.

Key Quotes

“The sharp weakening of the yen will be welcomed by the BoJ supporting their timely decision to shift to yield curve control which has contributed to their sharp widening in yield spreads between Japan and overseas. The sell-off in the Japanese government bond market has been relatively modest as the yield on the 10-year JGB has increased by only around 0.10 percentage point since the election of President Trump and remains capped by the BoJ’s target of around 0.00%.”

“The sharply weaker yen if sustained will help to improve the outlook for Japanese inflation in the year ahead. It is a welcome reversal after yen strength from earlier this year has been reinforcing disinflation pressures. The release overnight of the latest Japanese CPI report for October provided further encouraging evidence that disinflationary pressures are already beginning to fade. The BoJ’s preferred measure of core inflation accelerated marginally to an annual rate of 0.3% in October. The low point could now be in place with the sharply weaker yen making it more likely that core inflation will pick up gradually from early next year which would also encourage higher inflation expectations in Japan.”

“However, a Bloomberg report has cast some doubt on the likelihood of improvement in the inflation outlook. The report stated that the BoJ’s updated inflation framework from September has yet to have an impact amongst retailers citing recent price cuts from supermarket operator Aeon, Mister donut and Wal-Mart. The report also highlighted speculation that upcoming wage negotiations are expected to result in softer wage growth despite tightening labour market conditions.”