The price of fresh food encourages higher inflation in January
Japanese consumer price inflation is accelerated to 4.0% year to year in January, in line with market consensus (vs. 3.6% in December), because fresh food soared 21.9% (vs 17.3% in December) . The price of rice skyrocketed 70.9%. Not including fresh food, the CPI core rose faster than expected to 3.2% (vs 3.0% in December, market consensus 3.1%). The cost of food outside has increased over the past three months. Inflation rose 0.5% month to month, adjusted seasonally, with goods up 1.0% and service fees did not change. We believe that BOJ tends to focus on core trends rather than the main inflation. Although in line with the BOJ projection, price dynamics supports the central bank level normalization strategy.
JPY increased as a market expectation for an increase in interest rates
Various factors have market expectations that rotate towards interest rate increases: New Hawkish comments from Boj officials; GDP data is stronger than estimates; and increased CPI. Thus, 10Y Japan Bond (JGB) produced a significant rise, while JPY jumped against USD over the past week.
We believe that Boj prefers to avoid sudden movements at the market level, because currency reactions can reduce sentiment and economic activity. A sudden leap in long-term results will increase uncertainty about company and government funding. JPY’s sharp appreciation can hurt income. So, Boj will try to limit extreme market reactions. This morning, Governor of Ueda told parliament that BOJ would maintain a flexible JGB purchase operation. Trading on JPY and JGBS seemed rather calm after his remarks.
Flash PMI Forward in February
Japanese flash purchasing manager index shows services to help encourage economic recovery, while manufacturing remains slow. Overall, the two indexes increased from the previous month. PMI services rose to 53.1 in February from 53 in January, marking the expansion of the fourth monthly month. PMI Manufacturing rose to 48.9 from 48.7, but remained in the contractual area for eight months. New outputs and orders appear. We are worried that US tariffs will eventually reduce the economy. But so far, the negative impact has not yet been realized.
Inflation view is uncertain
Tokyo inflation data, which comes out next week, is expected to make it easier to simply in February. Food prices tend to rise further, but the new energy subsidy program must compensate for several benefits. We also believe the government is likely to introduce steps to stabilize the price of rice, which can tame the wider food costs. But with the increasingly intensive Trump tariff policy, BOJ will remain quite careful in the future.
Source: Ing
