Tokyo’s Inflation Reading Was A Shock To The System

Tokyo’s Inflation Reading Was A Shock To The System
Theodora Lee Joseph, CFA

4 months ago2 mins

What’s going on here?

Inflation in Tokyo jumped out from the shadows in October, taking the country’s central bank by surprise.

What does this mean?

After lying low for the last four months, inflation in Tokyo leapt into action during October. Goods – excluding volatile food prices – were 2.7% more expensive than the same time last year, while services prices rose at their fastest pace in nearly 30 years. Now, these figures just cover Japan’s capital city, but they’ll likely foreshadow the national data that’ll come out next month. Either way, whispers are already circulating: markets are wondering if the Bank of Japan (BoJ) might be forced to break away from its current inflation-fighting tactics.

Tokyo inflation

Why should I care?

For markets: The name’s Bond, inflation-fighting Bond.

So far, the BoJ’s been striking a balance between tackling inflation and protecting economic growth by preventing its 10-year government bond rate from moving any more than a percent away from its target on either side. That should, in theory, keep prices relatively level without jeopardizing domestic growth. But now that inflation’s threatening to blow past the central bank’s forecasts, the BoJ’s hand might be forced. That could mean widening the limits on those bonds, or bringing that strategy back to the drawing board completely.

The bigger picture: Japan’s making lemonade out of lemons.

Japan’s pulled interest rates up a lot slower than the US, UK, or Europe, which has directly caused the country’s yen to lag behind the dollar and euro. Thing is, that’s been a win for major Japanese companies that rely on exports, because a weaker yen makes their products more attractive to foreign buyers. And even with the threat of higher interest rates and the stronger currency that could come with them, corporate reforms in the country are buoying up businesses even more. No wonder big-name investors like Warren Buffett are still exploring the country.

Yen vs euro and dollar
Source: Google Finance
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