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Japan witnessing further slowdown in inflation expectations – Nomura

FXStreet (Delhi) – Yujiro Goto, Research Analyst at Nomura, notes that while the BOJ left its policy unchanged last Friday, inflation expectations among bond investors inched down further in October.

Key Quotes

“On average, bond investors expect core CPI inflation of 1.05% over the next 10 years, declining from 1.09% the previous month. Two-year inflation expectations recovered slightly to +0.94% from +0.91%, while one-year inflation expectations fell to 0.53% from 0.55% the previous month. 10yr average inflation is now its lowest level since January 2013. The slowdown in actual core inflation has been putting downward pressure on inflation expectations, even though core core inflation has been recovering recently.”

“The BOJ downgraded its near-term inflation forecast (FY2015-16) last Friday, without adding monetary stimulus, which could adversely affect inflation expectations among bond investors going forward.”

“October Tokyo core CPI inflation also slowed relatively significantly, suggesting actual inflation momentum could slow. The core CPI is expected to recover into 2016, thanks to the smaller negative impact from the fall in oil prices, but the possible slowdown in core CPI inflation could limit the positive impact on inflation expectations. Thus, real yield movements in Japan may not be catalysts for further JPY weakness in the near future, as the BOJ is still unlikely to consider easing imminently.”

“The Japanese Q3 GDP announcement on 16 November and reactions from policymakers to the data will be worth monitoring though, as the chance of negative growth rate is now high.”

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