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Japan CPI inflation falls as expected in Dec, points to ultra-dovish BOJ

Investing.com-- Japanese consumer inflation eased as expected in December, furthering bets that the Bank of Japan will keep its ultra-dovish policy largely unchanged when it meets in the coming week.
Core consumer price index (CPI) inflation, which disregards volatile fresh food prices, rose an annualized 2.3% as expected in December, data from the Statistics Bureau showed on Friday. The reading fell further from the 2.5% seen in November.
The core CPI index was also at its lowest level since July 2022.
A core reading that disregards both fresh food and energy fell to 3.7% from 3.8% in the prior month. The reading is closely watched by the BOJ as an indicator of underlying inflation, and was now well below a 40-year peak hit in 2023.
Headline CPI inflation fell to 2.6% in December from 2.8% in the prior month.
Softer fuel and utility prices were the key drivers of easing inflation, while food prices continued to grow at a rapid pace. Utility prices were also brought lower by government subsidies on electricity and gas, which were introduced in 2023 to help curb inflation.
Friday’s reading gave further credence to expectations that the BOJ will keep its ultra-dovish policy unchanged when it meets this coming Tuesday. Easing inflationary pressures and recent signs of sluggish wage growth give the BOJ little urgency to begin tightening policy.
The central bank is also expected to hold its ultra-dovish course amid uncertainty after a devastating earthquake at the beginning of the year. Rebuilding and stimulus measures in the wake of the disaster are widely expected to offset any monetary tightening by the central bank.
The BOJ is set to decide on monetary policy on Tuesday.
Still, increased fiscal stimulus may push up Japanese inflation in the near-term. Renewed weakness in the yen through January may also elicit a stronger inflation reading for the month.
The yen traded sideways after Friday’s inflation reading, but was close to its weakest levels since early-December.
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Schroder Investments: Will the Suez Canal shipping disruption affect interest rate cut expectations?

Zhitong Finance APP learned that on January 17, Schroders Investment issued a document stating that geopolitical tensions in the Middle East continue to rise and have affected the global supply chain. Major shipping lines say there will be serious delays in cargo deliveries as the Houthis attack ships that need to transit the Red Sea, the Suez Canal and the world's major economies. Satellite images show that few ships are currently sailing through the Red Sea, instead detouring through South Africa to major European ports, the United States and the United Kingdom.

Before the suspension of shipping in the Suez Canal, the Panama Canal was also facing some problems, including droughts caused by climate change and changes in rainfall caused by the El Niño phenomenon, which in turn caused the Panama Canal's water levels to drop. At the same time, wet weather in Europe caused excessive water levels in the Rhine River, Germany's main shipping route. Global supply chains appear to be facing a storm.

These questions evoke the difficult experiences caused by supply chain issues during the epidemic. These factors may have contributed to the recent outbreak of a new round of high inflation in financial markets, ultimately forcing global central banks to significantly raise interest rates. Financial markets are currently digesting expectations of significant interest rate cuts in Europe, the United Kingdom, and the United States, with interest rate cuts expected to begin as soon as the first half of 2024.

This raises another question: Will new supply chain problems push up inflation and force policymakers to reassess the economic outlook?

Much depends on how long the Red Sea disruption lasts. Since the current global economic environment is different in at least three aspects, the Red Sea problem is unlikely to lead to a significant rise in inflation.

First, the current market demand is weak. In the early stages of the epidemic, in response to supply chain disruptions, countries around the world adopted large-scale monetary and fiscal stimulus measures to boost the economy. However, global economic growth is currently showing a slowdown. Schroders expects global GDP growth to be only 2.5% in 2024 and 2025. The eurozone may already be in recession, with UK growth weak and US economic activity cooling.

Secondly, in the past, countries around the world implemented blockade measures to curb the spread of the new coronavirus epidemic, which caused market demand during the epidemic to be concentrated in the field of commodities. However, the current consumption pattern has returned to equilibrium. In fact, in the context of economic restart, market demand has shifted back to the service industry in the past few years, leading to a recession in the global manufacturing industry.

Third, the supply side of the global economy has also improved significantly. By contrast, ongoing lockdown measures during the pandemic have shut down production, but the current level of disruption is not as severe as it was then. While ships detouring around southern Africa will extend delivery times, goods will still get to their destinations, so extreme supply shortages are unlikely.

Six major currency pairs, US dollar index and gold resistance/support levels on January 15

This article provides support and resistance levels for the U.S. dollar index, euro, pound, Japanese yen, Swiss franc, Australian dollar, Canadian dollar and gold.

Japan’s Nikkei 225 surges to 34-year high as BOJ pivot bets fade

Investing.com-- Japan’s Nikkei 225 stock index rose sharply on Wednesday, reaching levels seen before the burst of a speculative bubble in the 1990s as investors bet on a delay in the Bank of Japan’s plans to end its ultra-loose policies.

The Nikkei 225 index jumped 1.3% and crossed the 34,000 level for the first time since January 1990, extending a raft of gains seen since mid-2023.

Technology stocks were the best performers, fueled by a mix of hype over artificial intelligence and amid growing hopes for softer U.S. inflation data later this week.

But the biggest source of support for the Nikkei was growing expectations that the BOJ will have to delay plans to end its ultra-dovish policy, following a devastating earthquake in central Japan which killed hundreds of people and caused widespread destruction in the region.

Rebuilding and fiscal stimulus efforts in the wake of the disaster are widely expected to offset any notion of monetary tightening by the central bank. The BOJ had maintained its ultra-dovish stance through 2023 despite shifting global sentiment.

An ultra-dovish BOJ was a key driver of Japan’s stock rally through 2023, as the central bank maintained its asset buying and yield control policies even as most of its global peers began hiking interest rates and ending pandemic-era stimulus measures.

Bets on a dovish BOJ were furthered this week by data showing declines in Japanese inflation and wage growth.

The Nikkei 225 was the best-performing major stock index in 2023, rallying about 30% for the year. In comparison, the S&P 500 added about 24%.

Strong corporate earnings from Japan also factored into the Nikkei’s 2023 rally, as local firms weathered a decline in global economic conditions. Slowing demand in China was a key pain point for Japanese exporters.

But Japanese businesses were also aided by a rebound in tourism, as foreign travelers flocked to the country to capitalize on a severely weakened yen. The yen was the worst-performing major currency in 2023 as it was battered by a growing rift between local and U.S. interest rates.

Still, the Nikkei’s 2023 rally comes after nearly 30 years of underperformance, as Japanese economic growth stagnated after the burst of a massive speculative bubble in the 1990s.

Recent data suggests that Japan’s economy may be cooling after seeing some strength through 2023. Gross domestic product shrank more than expected in the third quarter of 2023.

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