Japan: Gradual decline in inflation expectations - Nomura

FXStreet (Bali) - Inflation expectations among bond investors inched down further in February, according to Nikkei Quick, notes Yujiro Goto, FX Strategist at Nomura.

Key Quotes

"Inflation expectations among bond investors inched down further in February, according to Nikkei Quick. Bond investors expect core CPI inflation to be 1.36% on average over the next 10 years. After reaching 1.61% in July 2014, long-term inflation expectations have been declining gradually. Shorter-term inflation expectations also declined: 1-year inflation expectations are now at 1.11%, the lowest since October 2013 while 2-year inflation expectations slowed to 1.22%, the lowest since August 2013. Actual inflation momentum has been slowing, largely owing to lower oil prices, which depresses inflation expectations among bond investors."

"While inflation expectations declined slightly, nominal yields recovered in February, as US yields have been recovering and near-term BOJ easing expectations, especially expectations for an IOER cut, have declined). As a result, real 10yr yields rose to -0.98%, the highest level since June 2014, from -1.12%. The real 10yr yield differential between the US and Japan also shrank to 1.24% in February from 1.38% the previous month. The real yield differential recorded 1.54% in December 2014, the largest since January 2009, and it has been slowing since then, consistent with
the slowdown in USD/JPY appreciation."

"Real 10yr yields remain negative and inflation expectations among households remain resilient, suggesting that the BOJ is unlikely to consider easing at the meeting next week. Nonetheless, inflation expectations remain some of the most important economic data for the BOJ, and the gradual decline in expectations is likely to keep market expectations for BOJ easing alive. Household inflation expectations for February are scheduled to be published on 12 March, which will be important for the BOJ and JPY."