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1 Jul 2014
Japan: Inflation expectations rise - Nomura
FXStreet (Bali) - Inflation expectations among bond investors continued to rise in June, according to Nomura, referring to a new published survey by Nikkei Quick.
Key Quotes
"10yr average inflation expectations reached 1.56%, accelerating from 1.49% the previous month. This is the highest number since the data began in 2004. The 2yr average also rose to 2.07% from 2.00%, while 1yr average inflation expectations inched down to 2.31% from 2.38% the previous month. May core CPI inflation slowed to 1.4% from 1.5% in April, but inflation expectations among bond investors remain strong."
"Even though inflation expectations have been gradually rising, JGB yields are still at a low level, partly owing to the BOJ's QQE. Real 10yr JGB yields are now close to -1.00%, the lowest level ever. Pension funds have recently slowed their investment in JGBs, and they were net sellers of JGBs in May for the first time in 19 months. While pension funds slowed JGB investment, they accelerated risky asset investment in May. Pension funds are likely to keep purchasing domestic equities, according to TSE weekly data."
"The pace of JGB investment by insurance companies has been also slowing while they have purchased foreign bonds. Japanese investors have been slow to shift their portfolios after the introduction of QQE, but low JGB yields with higher inflation expectations may gradually encourage them to shift from JGBs into risky assets."
"Inflation momentum is likely to weaken over the next few months, as the impact of JPY weakness diminishes. Thus, the momentum of the rise in inflation expectations could also slow in the near future. Nonetheless, the likely inflation slowdown should cap upside room for nominal yields as well, and real yields in Japan are expected to stay low. Business and consumer sentiment is recovering after a temporary decline owing to the tax hike, suggesting Japanese investors' risk sentiment remains high beyond the tax hike. Thus, we expect Japanese portfolio shifts to continue gradually into H2 this year."
Key Quotes
"10yr average inflation expectations reached 1.56%, accelerating from 1.49% the previous month. This is the highest number since the data began in 2004. The 2yr average also rose to 2.07% from 2.00%, while 1yr average inflation expectations inched down to 2.31% from 2.38% the previous month. May core CPI inflation slowed to 1.4% from 1.5% in April, but inflation expectations among bond investors remain strong."
"Even though inflation expectations have been gradually rising, JGB yields are still at a low level, partly owing to the BOJ's QQE. Real 10yr JGB yields are now close to -1.00%, the lowest level ever. Pension funds have recently slowed their investment in JGBs, and they were net sellers of JGBs in May for the first time in 19 months. While pension funds slowed JGB investment, they accelerated risky asset investment in May. Pension funds are likely to keep purchasing domestic equities, according to TSE weekly data."
"The pace of JGB investment by insurance companies has been also slowing while they have purchased foreign bonds. Japanese investors have been slow to shift their portfolios after the introduction of QQE, but low JGB yields with higher inflation expectations may gradually encourage them to shift from JGBs into risky assets."
"Inflation momentum is likely to weaken over the next few months, as the impact of JPY weakness diminishes. Thus, the momentum of the rise in inflation expectations could also slow in the near future. Nonetheless, the likely inflation slowdown should cap upside room for nominal yields as well, and real yields in Japan are expected to stay low. Business and consumer sentiment is recovering after a temporary decline owing to the tax hike, suggesting Japanese investors' risk sentiment remains high beyond the tax hike. Thus, we expect Japanese portfolio shifts to continue gradually into H2 this year."