Japan: Low inflation expectations require BOJ patience - Nomura

Yujiro Goto, Research Analyst at Nomura, notes that the Japanese household inflation expectations remained subdued in December according to the Cabinet Office.

Key Quotes

“In December, 72.8% of households said prices would rise over the next 12 months, the same share as in November. However, fewer households expect a big rise in prices (5% or more) and the weighted average of inflation expectations slowed to 1.79% from 1.90% in November. Even though market-based inflation expectations have been recovering, the recovery in household inflation expectations is lagging.”

“The BOJ pointed out that Japanese inflation expectations tend to be more backward looking, and the weak recovery in household inflation expectations is consistent with the BOJ’s analysis. Even though the recovery in oil prices and JPY weakness point to an increased possibility of a recovery in inflation in Japan in 2017, the backward-looking formation of inflation expectations and wages in Japan are a big obstacle to the BOJ’s inflation target.”

“Weaker inflation expectations likely led to an improvement in consumer confidence, which rose to 43.1 in December from 40.9 in November. This negative correlation between inflation expectations and consumer confidence suggests the BOJ needs to be patient, as there could be criticism about JPY weakness from politicians when inflation expectations start picking up. BOJ Governor Kuroda maintained his dovish stance at the latest press conference, and we expect the Bank to leave its policy targets unchanged though.”  

“The sensitivity of JGB yields to global yields remains low, and the rate spread between the US and Japan recently narrowed. As the BOJ is unlikely to add fresh stimulus anytime soon while keeping its yield curve control framework intact, the rate spread between the US and Japan will likely be determined by US developments. The BOJ’s likely patient stance amid global reflationary trends should be JPY negative in the medium term, but the near-term trend will depend more on US factors, including communications from President-elect Trump on Wednesday and 20 January.”