Closing out the week for Japan, we have some important data that could move JPY pairs.
With the recent moves by central banks around the world, there is speculation around what the BOJ might do. Their easing policy is the longest in history, prompting concerns that they are out of ammunition to deal with a potential problem. The GDP on Monday might have been a bit of a relief, but let’s see if that carries over into inflation.
Complicating things further are the deepening concerns over economic growth as the US-China trade war rages on. Japan is also negotiating a trade deal with the US, but they seem to be having a lot more progress than the Chinese.
Further ahead, we have the pending tax hike. As recently as yesterday, the Minister of Finance was adamant that it would go through. Although, he did say the government would implement some kind of stimulus if it affected the economy.
The Data Points Coming Up
All the important data for the day is scheduled for release at 01:30 CET (or 19:30 the day before EST.) The most important of the three indicators is the core CPI. This is the one the BOJ tracks and uses most in policy decisions.
Expectations are for core CPI to come in at an annualized 0.7%, a drop from the prior 0.8%. This would take it back to where it was in February, and continue the sideways trend it has been maintaining so far this year. This is, of course, far from the BOJ’s target level, but that’s been the theme for a very long time now.
The Other Inflation Measures
When we add in the more volatile products in the CPI basket, the inflation situation is even worse. Total CPI is projected to slip one decimal to 0.4% from 0.5%. This, too, would put it back to where it was in February.
There is an almost identical situation with the CPI excluding food and energy. Expectations are for it to stay flat at 0.4%. This indicates that crude and the cost of food have actually gone down recently, making the situation more difficult for the BOJ.
The Market Reaction
A change in the BOJ’s stance in not really expected in the near future. This allows for more traditional analysis of the data. Japan has a long-standing problem getting the inflation to target, and the market has fully adjusted to the status quo. As such, inflation will likely influence the currency by the change in expectations on bond yields.
If inflation were to surprise to the upside, it could be tied back to the surprise jump in GDP (which was largely driven by trade). With increasing concern over the global economic outlook, investors might be looking for more safe havens, allowing capital flows back to Japan. This could potentially cause a technical increase in inflation, showing support for the yen.
If inflation were to come in below expectations, it would increase the pressure on the BOJ. And, it might prompt further talks of easing. This would be in line with the latest data and GDP trends, and could lead to weakness in the yen.
The Bigger Picture
Broadly speaking, Japan’s economic problems stem from a lack of industrial production to supply export. With the continuing trade war keeping global economic outlook muted, it’s not likely we will have a positive change from Japan in the near future. This would keep the broad trend supporting a stronger yen, even if there are small-term fluctuations due to specific data points.