Many things are big in Japan, but inflation isn’t one of them. But that may change sooner than you think. At least one metric suggests that Japan is actually pretty close to becoming the Land of the Rising Prices once again.
This, courtesy of Paul Krake at View from the Peak, shows Japanese CPI charted against brent crude priced in yen. Thanks to the yen’s slippery slide, it’s now back up to around the same level it was when Japanese inflation last ran briefly at about 1 per cent.
Sure enough, BoJ governor Haruhiko Kuroda said on Thursday that he’s already done all he needs to hit his 2 per cent inflation target within two years.
Krake estimates it’ll take around four months for the higher oil price to feed through into headline CPI. Mission somewhat accomplished.
The numbers might look promising, but are they the right ones? After all, higher petrol prices seem unlikely to convince Granny Matsumoto to go out and buy a new car, air conditioner, or hairdo.
Also – getting to the 1 per cent line is a good start, but there’s still quite a way to go. The yen will need to keep sliding, or oil will have to move higher.
On the yen at least, things don’t look hugely supportive. Though estimates vary, the results of Barclays’ recent bond investor survey suggest 100-105 is the most likely settling point. A bit more gas for gas prices, but not much.
And then there’s the question of FX hedging – this from Barclays’ Bill Diviney:
With the BoJ’s announcement last week that it would double the size of its balance sheet over the next two years, the question on the minds of investors around the world has been: where and how will this liquidity make its way out of Japan?
… a critical factor for the JPY – and FX more broadly – will be how much of this flow makes its way out of Japan unhedged. In particular, expectations have been building in some quarters that life insurers may start to reduce their hedge ratios, which as of Q3 last year remained at historically high levels. Such a change would obviously have major implications for the JPY. However, we would caution that it may be too soon to expect dramatic changes to FX hedging patterns, and this could limit the amount of yen selling by Japanese investors on the back of a BoJ-induced surge in outflows.
Since FX hedging costs are currently cheap — 0.2 per cent for dollar and 0 per cent for euro, respectively, with minimal worries from future moves in basis and short-term yield differentials pushing up costs — and with a relatively limited outlook for further yen downside from current levels it would appear prudent for lifers to maintain FX hedges for the time being.
So Kuroda’s bazooka may have scored some early hits, but getting that final kill may ultimately prove difficult, unless the oil market gets moving.
Related links:
Yen rises as Japanese sell foreign assets — FT
Japan should heed lessons of Volcker’s war — FT
Kuroda’s bazooka crimps South Korean stocks — FT