What will it take to get Japanese inflation to 2%? - Nomura

Analysts at nomura explained that the financial markets fluctuated sharply in late 2016 owing to Mr Donald Trump's victory in the US presidential election, the Fed becoming more hawkish, and the OPEC agreement to cut production. 

Key Quotes:

"Amid such conditions, interest has increased in the effects of financial market changes on the Japanese economy. Above all, the question we hear from investors is about the impact of yen depreciation versus the dollar and rising crude oil prices on inflation and the trade balance. 

Yardsticks for the conditions required for inflation to reach 2% are USD/JPY of 140 and a crude oil (North Sea Brent) price of around $55/bbl and USD/JPY of 130 and a crude oil price of $70/bbl. 

We divided our crude oil price assumptions into two cases and carried out simulations based on forex rates. 

In the case based on our assumptions for crude oil prices ($53.3/bbl at end-FY16, $56.3/bbl at end-FY17), with USD/JPY at 140 from 2017 Q1 core CPI (CPI less fresh food) reaches around 2% y-y in FY17 H2.

In the case assuming a crude oil price of $70/bbl for 2017 Q1 onward, USD/JPY of 130 is required for the inflation rate to reach 2%. 

The boost to prices from forex and crude oil factors will weaken as they run their course, so we think the Bank of Japan is unlikely to move into full gear in terms of an exit strategy. 

However, we need to watch for the possibility that the financial markets could focus their attention on an exit strategy in periods when inflation is rising."