After more than a decade of just the opposite, a little inflation is all most policymakers in Japan are preoccupied with trying to bring about these days.
That’s why the government has ramped up fiscal stimulus in recent months, and it’s also why the Bank of Japan is embarking on a monetary stimulus program unprecedented in scale. Together, the policies are expected to continue weakening the value of the Japanese yen, with the hope that this will contribute to a broad rise in consumer prices.
It looks like the plan is starting to work. Citi foreign exchange strategist Steven Englander passes along the chart below, which shows that inflation expectations have been creeping up in the past few weeks.
“The inflation expectations reflect a scheduled doubling of the sales tax in 2014/15 to 10%, so it is the recent run-up that is of interest, not the level, which is somewhat artificial,” says Englander. “However, the run-up in the last few days in both nominal and real rates may reflect that inflation policy has become more credible, possibly aided by well-publicised price increases by prominent firms.”
While Englander concedes that rising inflation expectations alone will not improve the structural competitiveness of the Japanese economy, he thinks “BoJ-enforced lower real rates will encourage Japanese investors to pull money from the JGB market (presumably replaced by BoJ buying) and encourage investment in other asset markets both domestically and abroad.”
“The combination,” says Englander, “will tend to reduce the real value of Japanese government debt, which could be a get-out-of-jail-free card for Japanese policymakers.”