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Japan: Half way there? - ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 14, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – James Smith, Economist at ING, notes that the BoJ Governor Kuroda reiterated this week that inflation is only half way to the 2% target, but their forecasts suggest that core inflation may be reaching its peak.

    Key Quotes

    “At present, the Bank of Japan (BoJ) is currently signalling that it expects inflation to reach 2% by the second half of fiscal 2016. Indeed, in a speech this week, Governor Kuroda reiterated the fact that inflation is “only half way” to the 2% target. At present, the headline rate is floating around zero and is only likely to pick up at a slow pace this year, although most are agreed that this is almost entirely an oil story. Hence, Kuroda will continue to draw market attention towards the BoJ’s preferred core CPI measure, which excludes the volatile fresh food and energy elements and currently stands at 1.2%.

    However, we believe that core CPI (using the BoJ’s definition) has virtually reached its peak. At present, the lagged effects of the large JPY depreciation is pushing up the annual rate, largely through food prices. However, the last significant JPY depreciation came in the final quarter of 2014, shortly after the BoJ decided to boost its QQE asset purchase programme.

    On balance, we believe that the effect of FX pass-through will drop out of the numbers faster than the rate of inflation of other “core items” will pick up. As such, the downside risks to core inflation easily outweigh the upside, something which is reflected in our forecast of around 1% at year-end. The chances of the BoJ reaching its 2% goal by the end of fiscal 2016 therefore look pretty slim.

    This means that the BoJ will face some tough decisions this year. Despite making technical adjustments to QQE in December which effectively extended the lifetime of the policy, the risk of the BoJ being unable to find enough JGB sellers to meet its annual quota has ultimately not gone away. Thus, there is very limited room left to offer fresh stimulus in its current form and indeed tapering will have to be looked at in the not-sodistant future (something which the new “summary of opinions” publication indicated is already being tentatively discussed)

    With this in mind, we do not believe that the BoJ will look to expand stimulus before this summer’s upper house election, as politicians are likely to remain wary of triggering further Yen weakness.”
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