Japanese inflation climbed to 3.6% for the 12 months to December 2024, a sharp increase from 2.9% in November.
Wages growth is even hotter, according to Jim Grant:
Wage growth is on the march in Japan, as nominal cash earnings jumped 4.8% in December from the prior year period, blowing past the 3.7% consensus to mark the hottest single reading since 1997. That striking data point further stokes an inflationary impulse which left nationwide CPI at a meaty 3.6% year-over-year clip in December.
Accordingly, a reluctant Bank of Japan has been forced into action, hiking overnight interest rates by one quarter percentage point to 0.5% late last month, its most restrictive rate stance since early 2008. However, EZ-money-minded Kazuhiro Masaki, director-general of the BoJ’s monetary affairs department, stuck to his rhetorical guns in an address to parliament this morning, declaring that “we must support economic activity with loose monetary policy.”
Not so fast, Goldman Sachs believes. Further tightening is in the offing as soon as July per predictions from senior Japan economist Tomohiro Ota, with benchmark borrowing costs poised to reach 1.5%, a level unseen for 30 years.
The Yen strengthened in recent weeks, with lower Trend Index peaks indicating buying pressure (selling pressure for the USD cross). Breach of support at 150 would signal another test of 140.
A stronger Yen is typically bullish for bonds, with the 10-year Treasury yield (gray) declining in synch with the Yen/Dollar exchange rate (blue).
A strong Yen is also typically bullish for stocks, with the S&P 500 (navy) rising when the Yen/Dollar exchange rate (blue) declines.
Conclusion
The Bank of Japan is expected to hike the overnight rate by 100 basis points in 2025, to a level not seen in 30 years. Rate hikes are likely to significantly strengthen the Yen against the Dollar, with a medium-term target of 140.
A sharp fall in the exchange rate increases financial market volatility in the US as carry trades unwind. However, a strong Yen typically coincides with falling long-term US Treasury yields, which would be bullish for stocks.
Acknowledgments
- Trading Economics: Japan Inflation Rate
- Grant’s Daily: Ebb and slow