Japan's recently released inflation data for January showed a striking trend: consumers** rose 2% year-on-year excluding fresh food. This data not only met the market's expectations, but also slightly exceeded the consensus expectations. The news quickly reverberated in financial markets, with the Japanese government bond market reacting significantly, with two-year yields climbing to their highest level since 2011.
This rise in inflation data provides strong support for the Bank of Japan to potentially adjust its negative interest rate policy in the coming months. Kazuya Fujiwara, a strategist at Morgan Stanley** at Bank of Mitsubishi UFJ, noted that the report increased market speculation that the Bank of Japan could end its negative interest rate policy in March this year and served as a catalyst for the bond sell-off. He highlighted that the January CPI report highlighted the persistence of inflationary pressures in Japan.
The rise in inflation data has further raised market expectations for the Bank of Japan to raise interest rates for the first time since 2007. Many observers expect that the Bank of Japan may raise interest rates by April this year. This expectation is also reflected in the movement of Japanese bank stocks, which have continued their trend due to the expected increase in profitability. The yen also edged up after the inflation data, and the consensus is that the Bank of Japan may lift the zero interest rate policy by June this year.
Koya Miyamae, senior analyst at SMBC Nikko**, said: "This data supports the view that the Bank of Japan will normalize policy in the coming months. This suggests that the bank is one step closer to achieving its inflation target. Despite some peculiar factors, the inflation data remained above 2%, which is a positive sign for the Bank of Japan. He further said that core inflation could break through 2 in February this year5%。
It is worth noting that an important factor that contributed to the larger-than-expected inflation was the significant increase in overseas travel. Although the depreciation of the yen has attracted a large number of foreign tourists to Japan, it has also pushed up the cost of overseas travel for Japanese people. Bank of Japan Governor Kazuo Ueda is confident in the prospect of keeping inflation above 2% and expects the virtuous economic cycle of prices, wages and employment to be further strengthened.
At the same time, the impact of repressive measures is gradually fading in a year-on-year comparison, and Japan's inflation data for February this year is also expected to appear**. When these measures were first introduced last year, they amounted to pulling headline inflation down by one percentage point. Economists generally agree that core inflation is likely to continue to rise in the coming months.
However, the better-than-expected inflation data also posed some challenges for the Japanese economy. Although inflation has reached or exceeded the BOJ's target for 22 consecutive months, wage growth still lags behind inflation, putting pressure on household budgets. To some extent, this has led to a decline in Japanese Prime Minister Fumio Kishida's approval ratings. In addition, the yen's hovering near multi-decade lows against the dollar could also further exacerbate import-driven inflationary pressures and negatively impact consumption.
Despite these challenges, the BOJ is likely to welcome the better-than-expected inflation data, as it provides more reason for it to exit its negative interest rate policy. However, economists and investors will be keeping a close eye on inflation data in the coming months to assess the likelihood and timing of the BoJ's policy adjustment. At the same time, it is widely expected that if the Bank of Japan chooses to start raising interest rates, it will need to communicate carefully to balance the goals of economic growth and inflation control.