An indicator of investors’ inflationary expectations in Japan has risen to a record high, which could encourage the Bank of Japan (BOJ) to continue raising interest rates, analysts say.
The break-even inflation rate (BEI) exceeded 1.6 percent level on Monday, following the BOJ’s additional interest rate hike to 0.5 percent and upward revision of its price forecast last week.
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.
Photo: Bloomberg
“The breakeven yields are moving up, suggesting the market is beginning to reflect greater confidence that BOJ will achieve its inflation target on a consistent basis and may need to hike further,” Robeco Group’s Asia sovereign strategist Philip McNicholas said.
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, Nomura Securities Co chief strategist Naka Matsuzawa said.
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, adding 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 Friday, 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 percent to 2.2 percent, and for fiscal 2025 from 1.9 percent to 2.1 percent. The Japanese central bank assessed that the risk of an upward swing was greater in both years.
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