The ex-fresh food & energy measure of Japanese core CPI inflation has climbed further above the BoJ’s target, firming from 2.05% to 2.26% in October. The sharp easing of services inflation during 2024 had led many to conclude that there was no rush for the BoJ to hike rates. But the acceleration in underlying measures of wage growth suggested it was only a matter of time before the m/m CPI prints rebounded.
Earlier today, Japan’s cabinet approved an economic stimulus package totalling ¥21.9tr, equivalent to $141.71bn, aimed at easing rising living costs and promoting business innovation and investment. The government is planning cash-handouts and to resume subsidies for gas and electricity bills from January to March next year. But ultimately, more fiscal stimulus, including energy subsidies, serve to weaken the yen. This not only pushes import prices higher, but exacerbates labour shortages, thereby also feeding through to higher services inflation.
It was clear, over the summer, that the 2-year JGB was mispriced. Though the 2-year JGB yield has now risen to 0.58%, it still has a long way to climb, as it makes its way towards 1% next year. The BoJ will have to pursue a more hawkish path than markets anticipate, to prevent the yen from weakening further, and to cap the sell-off in the long end of the curve. The 40-year JGB yield is now up to 2.55%.
