(Bloomberg) — An indicator of investors’ inflationary expectations in Japan has risen to a record high, which could encourage the Bank of Japan to continue raising interest rates, analysts say.
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The break-even inflation rate (BEI) exceeded 1.6% level on Jan. 27, following the BOJ’s additional interest rate hike to 0.5% and upward revision of its price forecast. The BEI is calculated by subtracting the yield on inflation-linked bonds from the yield on newly issued 10-year government bonds and Monday’s level marks its highest since 2004, when inflation-linked bonds were first issued, according to data compiled by Bloomberg.
“The breakeven yields are moving up, suggesting the market is beginning to reflect greater confidence that BoJ will achieve it’s inflation target on a consistent basis and may need to hike further,” said Philip McNicholas, Asia sovereign strategist at Robeco.
An increase in the BEI, which is a typical indicator of inflation expectations in financial markets, will make it easier for the BOJ to push through an interest rate hike as it puts pressure on the yen via falling real interest rates.
Although the BOJ is raising interest rates in contrast with global central banks, Japan’s real interest rates remain negative and the gap with overseas rates has not narrowed, Naka Matsuzawa, chief strategist at Nomura Securities. There is a strong view that there will be a gap of around six months before the next interest rate hike, and “There is also a lot of room for yen carry trades to resume,” he said and added that the BOJ will continue to raise interest rates in a manner that tracks the depreciation of the yen.
At its Monetary Policy Meeting on the 24th, the BOJ decided to raise interest rates for the first time since July last year. In the Outlook for Economic Activity and Prices released after the meeting, the Bank revised its forecast for the year-on-year rate of change in the CPI excluding volatile food and energy (core-core CPI) for fiscal 2024 from 2.0% to 2.2%, and for fiscal 2025 from 1.9% to 2.1%. The Bank assessed that the risk of an upward swing was greater in both years.
“Although it is a cost push, there is a possibility that the expected inflation rate will increase slightly due to rising prices.”, said Governor Kazuo Ueda at a press conference on the Jan. 24.
