Japan is emerging from its ‘deflationary mindset’. The BoJ is at risk of overshooting its inflation target over the next couple of years.
It is not so clear how to trade this, however, given the many crosswinds buffeting the global economy.
The latest inflation data increase the chances that the BoJ shifts its stance earlier-than-expected, which could push the yen back towards 120 against the dollar next year.
At the same time, the surge in Covid cases in China (and Japan) may provide yet another perfect excuse to delay any change to policy until after Kuroda’s term expires in April.
Indeed, inflation has peaked in the US, and China is struggling to contain Covid. China reported almost 28,000 new cases on Tuesday, and lockdowns are more widespread than during the Spring.
This could disrupt supply chains once again, but it could also sap what is left of Chinese demand. Shipping rates are tumbling back to pre-pandemic levels and energy prices have fallen. Oil is the wild card here.
In any case, the underlying shifts in Japanese inflation are significant, and should be noted, for they will matter in 2023.
This is another warning, as the government embarks on an additional Y29 trillion ($207 billion) economic stimulus package this fiscal year.
