The BOJ is considering raising its inflation outlook – this would pave the way for a policy pivot!
Before the post starts, hat tip and big thanks to JC i comments on this post.
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Via Nikkei media, a significant piece if accurate.
The Bank of Japan is considering raising its inflation
Inflation
Inflation is defined as a quantitative measure of the rate at which the average price level of goods and services in an economy or country increases over a period of time. It is the increase in the general price level where a given currency actually buys less than it did in previous periods. In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or the measures of it are extremely influential. Inflation stems from the aggregate creation of money. This money is measured by the level of the total money supply in a particular currency, for example the US dollar, which is constantly rising. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply than the wealth produced (as measured by GDP). As such, this generates a demand pressure on a supply that is not increasing at the same rate. The CPI then rises, generating inflation. How does inflation affect Forex? The level of inflation has a direct impact on the exchange rate between two currencies on several levels. This includes purchasing power parity, which attempts to compare different purchasing powers for each currency. country according to the general price level. This makes it possible to determine the country with the most expensive cost of living. Consequently, the currency with the higher inflation loses value and falls, while the currency with the lower inflation rises in the foreign exchange market. Interest rates are also affected. Excessively high inflation rates push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency in the foreign exchange market.
Inflation is defined as a quantitative measure of the rate at which the average price level of goods and services in an economy or country increases over a period of time. It is the increase in the general price level where a given currency actually buys less than it did in previous periods. In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or the measures of it are extremely influential. Inflation stems from the aggregate creation of money. This money is measured by the level of the total money supply in a particular currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply than the wealth produced (as measured by GDP). As such, this generates a demand pressure on a supply that is not increasing at the same rate. The CPI then rises, generating inflation. How does inflation affect Forex? The level of inflation has a direct impact on the exchange rate between two currencies on several levels. This includes purchasing power parity, which attempts to compare different purchasing powers for each currency. country according to the general price level. This makes it possible to determine the country with the most expensive cost of living. Consequently, the currency with the higher inflation loses value and falls, while the currency with the lower inflation rises in the foreign exchange market. Interest rates are also affected. Excessively high inflation rates push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency in the foreign exchange market.
Read this term forecasts in January. This would happen via the bank’s next quarterly economic outlook report, which comes after the board meeting on 17 and 18 January. New forecasts will show price growth close to its 2% target in fiscal 2024. Nikkei cites people familiar with discussions at the BOJ:
- proposed changes will show that the core consumer price index, or prices excl. fresh foods, rising about 3% in FY2022, at least 1.6% but less than 2% in FY2023, and nearly 2% in FY2024
- The previous inflation forecasts published in October were 2.9%, 1.6% and 1.6% respectively.
Raising the inflation forecast in this way would form the basis of “a focal point away from ultra-loose monetary policy“.
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Bank of Japan Governor Kuroda has insisted that he expects inflation to fall from the middle of Japan’s next fiscal year. Japan’s fiscal year begins on April 1.
A change in the forecasts would be very significant and carry the implication of a political turning point, as the Nikkei says, giving tailwinds to the yen.
