Japan Inflation Outlook Jumps, Backing BOJ Case for Rate Hike
(Bloomberg) -- Inflation expectations in Japan have risen to the highest since at least 2004 by one measure as the tumbling yen pressures import prices higher, adding to the case for the central bank to raise interest rates.
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Japan’s 10-year breakeven rate, the yield difference between nominal government bonds and same-maturity inflation-linked securities, rose to 1.598% on Thursday, Bloomberg-compiled data show. That was the biggest gap on record in data going back to 2004, when inflation-linked notes were first issued, suggesting that investors are expecting the cost of living to climb.
The yen’s relentless slide in recent months is fueling speculation that the Bank of Japan may lift rates for a second time this year as soon as its next policy meeting on July 30-31, in part to support the currency. One in three economists surveyed by Bloomberg expects the BOJ to raise rates next month in addition to unveiling a road map for its path toward quantitative tightening, according to a poll published this week.
Rising inflation expectations “will make it easier for the BOJ to explain that policy is accommodative enough even if interest rates are raised once or twice,” said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute. If the yen continues to weaken, he said he sees a strong possibility that the BOJ will announce a reduction of its purchases of JGBs and raise interest rates at the same time in July.
Benchmark 10-year bond yields rose to 1.08% on Thursday, the highest in about a month. BOJ Governor Kazuo Ueda said on June 14 that 10-year yields around 1% were “still accommodative enough” considering that with inflation expectations rising, real yields remain negative.
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