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Dipping inflation puts BOJ under pressure

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Nov 3, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Mumbai) - Japan's central bank decided to keep its monetary policy unchanged on Friday despite little progress made by the BOJ in the direction of spurring inflation. Though the Central bank’s asset purchases has been injecting fund into the economy each month, the inflation figure is still near zero. Abenomics has been focused on getting consumers and businesses to spend more. Unfortunately, however the various policy stances have not been able to move inflation numbers anywhere close to the BOJ’s set target of 2 per cent.

    According to Nikkei Quick inflation expectations among bond investors dipped in October. Investors expect core CPI inflation of 1.05% over the next 10 years, a dip from 1.09% the previous month. One-year inflation expectations also fell to 0.53% from 0.55% the previous month. The BOJ downgraded its near-term inflation forecast (FY2015-16) last Friday.
    However it did not add any monetary stimulus thereby raising fears of an adverse impact on inflation expectations among bond investors.

    Tight labour conditions are in place to force companies to raise wages and in the process raise inflation. To counter the tight labour conditions companies have expanded overtime and hired more part-time workers. This measure adopted by companies to restrict labour costs has hindered efforts to boost inflation, the central bank said in its analysis. The central bank noted that "given that firms have been seeing record profits and the unemployment rate has declined to the range of 3.0 per cent to 3.5 per cent, the pace of improvement in wages has been somewhat slow."

    Data for September showed the core inflation at minus 0.1 per cent. Household spending fell 0.4 per cent in September from a year earlier, while incomes slipped 1.5 per cent. Unemployment remained at 3.4 per cent, and there were 1.24 jobs available for each job seeker. Kuroda has contended that the BOJ has done everything it can to boost growth. This raises expectation that more easing may be on its way. The BOJ hinted at further expanding stimulus in the future to counter weak exports and other threats to growth. The Bank of Japan is of the opinion that slowing growth in China and other emerging markets have negatively impacted Japanese exports and industrial production.

    The Japanese Q3 GDP will be released on 16 November. The chance of negative growth rate is now high. In the backdrop of slowing growth and dissatisfactory inflation figures, the BOJ might have to resort to further easing to keep afloat the overall sentiment. The BOJ has not completely ruled out rate cuts stating that it may consider further action later and would study risks to economic activity and prices "and make adjustments as appropriate."
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