Japan inflation expectations tempered slightly

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What's going on?

According to a survey of Japanese corporations, expectations for the rate of inflation in five years time has weakened slightly from 1.7% to 1.6%. The tankan survey is a huge survey of Japanese corporate sentiment. The section on inflation expectations has been an important barometer for the Bank of Japans past decisions to implement quantitative easing, which is the buying of its own governments bonds.

What does this mean?

Inflation is the rate at which prices of goods and services in an economy are rising (on an annualised basis). In theory, the corporations expectations should guide their future decisions on price and wage rises, making it somewhat of a self-fulfilling prophecy and hence an accurate barometer of future inflation levels. Japan, like other major developed economies, targets an inflation rate of around 2%. Inflation is currently around 0%; the aggressive quantitative easing that the Bank of Japan has been undertaking for the past two years has helped to increase future inflation expectations such that inflation should increase in the future.

Why should I care?

The Bank of Japan is desperately trying to create some inflation in its economy. Its favoured measurement of its success is this tankan survey of inflation expectations. Therefore, to the extent that inflation expectations are below what the BoJ is targeting, it becomes more likely that it will either continue quantitative easing for longer than expected, or possibly even increase the amount of government bonds that it is buying in order to increase inflation expectations. Quantitative easing is generally good for domestic stocks but bad for the value of the domestic currency. If inflation expectations continue to move lower, it is one major sign that the effects of QE could be even more pronounced in Japan: meaning the stock market may go higher as the Yen continues to weaken versus, particularly, the US dollar.
Originally posted as part of the Finimize daily email.

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