“Inflation is like toothpaste. Once it's out, you can hardly get it back in again.” Said Dr. Karl Otto Pöhl. Will it be the case with Japan as it is with the rest of the world? Last week Japan saw a 40-year high core CPI of 3.7% YoY as living expenses rise dramatically. A potential exit from the Negative Interest Rate Policy (NIRP) could be near to curbing inflation; however, the worsening global economy could act as a headwind toward monetary tightening by the Bank of Japan making the next step mysterious. The hike was the largest seen since the 1979 Oil crisis as seen in the below figure.
Figure 1: Japan Core CPI (2000-2022)| Source: TradingEconomics
As broader inflationary pressures continued to permeate throughout the economy, the core consumer price index in Japan—which excludes fresh food but includes gasoline costs—rose 3.7% from a year earlier in November 2022. November’s figure was as expected by analysts and came after an increase of 3.6% in October. The central bank's 2% objective was also exceeded by core inflation for the eighth consecutive month, casting doubt on the Bank of Japan's prediction that recent cost-push inflation will be short-lived. It is expected that it could persist during the first half of next year. Many Japanese firms announced plans to increase prices for 7,152 food products during the first quarter of 2023, more than twice as many as they did during the same period in 2018, according to a survey by research firm Teikoku Data Bank.
As the year ended, the Bank of Japan (BOJ) abruptly changed a fundamental tenet of its monetary policy, it took investors off guard and sent ripples through the currency, bond, and equities markets. The BOJ allows the 10-year bond yields to vary by ±0.5 percentage points of its target of 0 compared to the previous band of ±0.25 percentage points while keeping the interest rates at -0.1%. The move implies an expected interest rate hike; however, Kuroda, the governor of the BOJ, clearly stated, “This measure is not a rate hike”. Changes in policies might signal a new era for the Japanese yen just like the December 1989 BOJ’s decision did. Another shocking figure was Japan's GDP contracting by 0.8% YoY during Q3 as concerns about a global recession and rising import costs affected consumer spending and business activity. While economists anticipate GDP to have accelerated in Q4, it is unclear again if salaries will grow sufficiently to offset households' rising living expenses and support spending. The OECD forecasts Japan’s Real GDP growth rate to be around 1.8% and 0.9% in 2023 and 2024 respectively.
The two days- meeting (Jan 16-18) will be anticipated by the market. Will the BOJ surprise investors one more time with another unexpected move as Japanese inflation “overshoots”? or It will leave it to the invisible hand to moderate the market?..
The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell. The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI. Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.