Japan CPI inflation likely to rise following cheaper yen, wage growth to determine core inflation

The consumer price index of Japan is expected to rise as a cheaper yen boosts import prices. But there will be a time lag of about six months, as inferred from the 2013-14 experiences. Considering the appreciation of the yen earlier this year, the downward pressures on consumer prices should continue to linger in the remainder of 2016 and in early-2017.

The underlying core inflation, meanwhile, is expected to be largely determined by wage growth and consumption demand, instead of the short-term fluctuations in the exchange rate, DBS reported.

The recent depreciation of the yen should have positive impact on Japan’s growth and inflation outlook, but the impact may not be significant. Consumer sentiment will likely improve as the local stock market is rising in sync with the USD/JPY rate.

Exporters’ profits will receive a boost from the weaker yen, but export volumes would remain stable. This has been proved by the past experiences in 2013-14 when the yen depreciated sharply by 50 percent versus the dollar under the Bank of Japan’s aggressive easing program.

Meanwhile, the yen has depreciated by about 4 percent against the US dollar over the past one week, reducing the need for the BoJ to pursue deeper negative interest rates. The 2-year JGB yield has risen to converge with the BoJ’s policy rate of -0.1 percent and the 10-year yield has also converged with the BoJ’s target of 0 percent. This, in turn, reduces the urgency for the central bank to taper the quantity of bond purchases so as to normalize the yield curve.