Japan’s January CPI

During the upcoming Asian session, market moves are likely to shift around the Japanese yen, as we have a fresh serving of key macro data coming out.

Three inflation data points will be released at the same time. They are expected to get extra attention due to the latest trends, as well as the BOJ struggling to unwind its extreme easing position.

Here are some things that might help get you ready for this data release.

Schedule and Expectations

Japanese CPI data is expected to be published on Thursday at 18:30 EST (or Friday at 00:30 CET), and is the only major event on the economic calendar for the Yen.

Of the three versions of CPI being published, the one that investors pay attention to the most is the Core CPI. This is because that’s what the BOJ tracks in making its policy decisions. Current expectations are for it to drop to an annualized rate of 0.5% from 0.7% in the prior month.

The CPI excluding food and energy is expected to come in lower than the prior month as well, at 0.2% annualized compared to 0.3% prior. Total CPI is the only one expected to rise, at 0.6% versus the 0.3% reported in December.

Japan’s Inflation Problem

The BOJ has a target rate of 2.0% annualized inflation. The rate has remained stubbornly below that level since early 2015, despite the largest and longest easing cycle in history. This is causing quite a bit of headache for the central bank and government planners.

To make matters worse, inflation has been ticking down in the last few months. After peaking at 1.0% annualized in October, it subsequently slipped down to 0.7% in December.

The total inflation rate has performed worse, dropping as low as 0.3% in the last report. Both of those missed expectations, as did the quarterly GDP data, coming in at 0.0% annual growth.

Trade is the Issue

Exports are key to the Japanese economy. And with the world economy showing jitters, it’s not surprising that exports are suffering. Exports to China were last reported down 8.4% year over year (though part of that might be the effect of the Lunar New Year). The ongoing trade war with the US is leaving some collateral damage in Japan.

However, this reaches the currency as well, since the purchasing power of the currency translates directly to the trade balance. A strong currency helps reduce the cost of imports, which leads to lowering inflation.

At the same time, it makes exports more difficult due to higher prices. The thing is, as the economy appears to be weaker, investors flock to the perceived safety of the yen. This causes the currency to appreciate. So far this year, it has strengthened more than 3%.

Monetary Policy

The other factor is the divergence in monetary policy and the consequences of the BOJ’s long easing cycle. With interest rates remaining stagnant and the bank still making asset purchases, the regulator is very low on ammunition.

And the ammunition it does have is quite expensive. Already, Japanese banks are complaining that low rates are causing them to lose money. Further easing would just make the financial situation worse.

On the other hand, Japan’s major partners are switching to a more accommodative stance due to a worsening outlook in the near term. This would further increase the value of the yen, making the trade balance-inflation paradigm worse.

The Market Reaction

An increase in the inflation rate above expectations might be seen as a bit of a relief for the BOJ and allow for potential future action. This will likely be seen as negative for the yen. The flip side is that a lower than expected inflation would signal further economic issues, which does not exactly support the currency, at least in the longer term.