Japan’s Inflation is doing its thing, but don’t expect the BOJ to act

• Nationwide CPI rose to 3% y/y (2.6% prior)
• Core CPI rose to an 8-year high of 2.8% y/y (2.4% previously)
• CPI excluding food and energy rose to 1.6% y/y (1.2% previously)

There’s no escaping the fact that inflation is rising in Japan with it sitting at an 8year high. Although it remains at much lower levels compared to many of its peers. And whilst inflation remains above their 2% target, it is not by a wide enough margin to expect the BOJ to suddenly shift from an ultra-dovish monetary policy. Besides, as stated in their quarterly economic outlook in July, inflation is expected to continue to rise towards the end of the year – which is exactly what we are seeing. But its current trajectory is to be sustained through to next year, then perhaps the BOJ will begin to sweat.

Corporate goods are showing signs of softening but remain historically high at 9% y/y. Average earnings is in a similar situation at 4.7% y/y, and with various CPI reads all pointing higher it would appear it has every intention of trying to close the gap between wages and corporate prices.

For now, traders remain unconcerned and that is having a positive impact on the Nikkei 225 ahead of the FOMC and BOJ meetings this week.

Nikkei 225 daily chart (Japan 225 CFD)

A small bullish hammer formed on Thursday to show a loss of bearish momentum, alongside a false break of trend support. A bullish engulfing candle formed on Friday and closed above the 100 and 200-day EMA's. Its low also respected a 50% retracement level and closed back above trend support for a second consecutive day.

We therefore suspect a bounce is on the cards, although as markets are wary of the upcoming FOMC meeting we are also aware that any such bounce may limited, so traders would be wise to keep a close eye on price action and not expect oversized moves, unless a new catalyst arrives.

A potential bullish outcome for equities in general is if the Fed surprise with a less-hawkish-than expected hike. We know 75bp is mostly priced in, so if they hint at a slower rate of hikes going forward, equities might be able to cobble together a relief rally. Whilst a hawkish hike would likely present indices with swing highs and another leg lower. 

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