What does Japan CPI rise mean for the BoJ?

FXstreet.com (Barcelona) - In a clear sign of temporary victory by 'Abenomics' radical policies, Japan printed the sharpest rise in core inflation in almost 5 years, with the read out at +0.4% y/y vs 0.3% exp. The rest of indicators were also encouraging.

Inflation is on top of the list for the BoJ

One of the top priorities by Japan is to end a 15-year deflation cycle, so that the country can start to develop a self-sustaining recovery. In large part, this is the main reason behind the radical ultra-loose monetary policy being currently deployed by the BoJ, which has committed to double the amount the central bank purchases in Japanese government debt.

The country will continue to actively assess how these increases in price pressure - still minimal - are having an impact on the mindset of the population, potentially leading to support more credit, spending and rise in salaries. However, as IFR Markets Editor Amanda Tan notes, "a planned sales tax hike in April next year - from 5% to 8% - poses a downside risk to spending & sentiment, particularly if wages don't start to rise."

What does the ease in deflation mean for the BoJ?

Despite the rise in CPIs, there is still a long way to go for Japan to heighten investor's perception that the country is really exiting years of depressed price levels, needing a larger sequence of optimistic CPI results to convince the market that the BoJ stimulus are working through the economy and that a possible exit strategy may be considered.

Over last weekend's G20 meeting, Mr. Kuroda reiterated his commitment to stay on course with the program, saying "it is still premature to have any detailed debates over exit policy." Kuroda even emphasized that he sees greater overseas support and understanding for the BOJ policies, a comment that he may, at a later stage, use to become not hesitant to pump more money into the economy if price pressures recede again.

It is still way too premature to speculate on a won battle against deflation, and judging by the ambitious target of 2% in 2 years, the rate of CPI increments so far suggests it will be very challenging. The bottom line is that the CPI readings today change nothing in terms of the accommodative stance by the BoJ, still expected to stay ultra-dovish for a significant period of time, with the risks of additional easing later this year still present.

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