For years Japan has been struggling with deflation. So, now we see inflation rising in Japan it really is a strong signal that inflation is building around the world.

Inflation lifts

Japan’s inflation expectations have now increased to the highest level in three years. Japan’s 10-year break-even rate has climbed to its highest level since2018 this week. It has been the weakness of the yen and the combination of rising energy prices, supply chain costs, and rising raw materials which have all been supportive of higher inflation.

USDJPY

It was noteworthy that Japan wholesale inflation hit a 13-year high, this puts the squeeze on industry profits as costlier input prices are not being passed on to consumers. However, how long can that last before the inevitable price bump comes along?

Japan is vulnerable to the moves higher in natural gas and oil as it is an energy importer and this increases cost pressures further.

The signal

If inflation is coming to Japan, it is coming everywhere. It looks like a more stagflationary environment is brewing. Stagflation is defined as high inflation, but low growth. It tends to favour gold, TIPS, the dollar and consumer staples. It is too early to say this is high conviction. However, it is a growing risk that is increasingly being spoken about. Here is the news trend on ‘stagflation’ according to Bloomberg:

Chart


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