Week in FX Asia – Japanese Inflation Validates Abenomics

• Core inflation up 3.2%, deflation could be in the past.
• Retail sales drop after sales tax hike. Pre tax hike consumption boosted GDP in Q1.
• Bank of Japan announces possible end of QE. IMF disagrees.

The plan by Prime Minister Shinzo Abe to kickstart the Japanese economy paid some dividends this week with the inflation report. The strategy now dubbed Abenomics got a huge boost when the Bank of Japan agreed to to double its monetary base in two years. The 3 arrow strategy from Abe involves bold monetary stimulus, fiscal health goals and deep reforms. So far the Bank of Japan has delivered on its first arrow. The second arrow has been fired with the increase of the sales tax rise from 5 percent to 8 percent in April. The third reform arrow has been the slowest to get out of the quiver and into the bow although this week saw some progress on that end.

The sales tax rise had a positive transitory effect in the first quarter of the year that saw Japan growth at a 5.9% pace due to consumers rushing to avoid the new sales tax increase. The expectations for the second quarter of the year are for slower growth as exports and internal consumption continue to decline. The island dispute with China has reduced exports to that country. The strong lobbies don’t allow Japan to enter into the Trans Pacific Pact that could offset the lost sales to China.

The Bank of Japan issued comments this week about exiting its QE policy. The International Monetary Fund criticized those comments and warned Japan of ending the program too soon. The IMF has forecast Japan will not reach its inflation target of 2 percent until 2017, later than expected by the Bank of Japan. This echoes some of the comments inside the BoJ regarding reaching its lofty Abenomics goals.

The USD/JPY was rangebound below 102 for most the week. The contradictory statement from the Bank of Japan and the IMF regarding QE will be something to follow as the market agrees with the IMF.

Next Week For Asia:

The week will be mostly paying attention to the American and European markets. Australia Reserve Bank will represent Asia Pacific with their rate announcement. The majority of the action will be around the ECB and their expected monetary policy changes. BoE and BoC also have rate announcements, but little changes are expected. The week will close with the release of Non-farm payrolls in the US. The number is expected higher due to a thawing effect after the harsh winter.