JPY: Disinflation tempers energy shock – Commerzbank

Commerzbank analyst Volkmar Baur highlights that Japanese inflation fell more than expected in February, with weak services and food prices pointing to ongoing disinflation despite higher Oil. He argues this backdrop does not force immediate Bank of Japan action, expects a conservative policy response to rising energy costs, and sees the Japanese Yen benefiting if the Iran conflict ends.

Soft core pressures limit BoJ urgency

"Japanese inflation fell more sharply than expected in February. The year-over-year increase last month was just 1.3%, down 0.2 percentage points from January and below the median forecast of analysts surveyed by Bloomberg."

"Seasonally adjusted, prices fell by 0.3% from the previous month, though it must be noted that this was largely driven by a decline in energy prices. While this may give the impression that the figures are outdated in light of the Iran conflict and offer little insight into the future, it’s not quite that simple."

"For one thing is clear: the rise in oil prices is likely to push inflation in March about 0.3 percentage points higher than in February, driven by gasoline prices alone. However, the figures also show that overall inflationary pressure appears to continue easing."

"All in all, this is likely an environment that does not compel the Bank of Japan to take immediate action. Rising energy prices will indeed push up inflation. However, disinflationary trends still predominate for the moment. The Bank of Japan is therefore likely to react much more conservatively to the rise in energy prices, though the market is already anticipating this. Conversely, this means that if the conflict ends, the JPY is likely to benefit."

"Price data from March also suggests that while gasoline prices are rising significantly, this does not yet seem to be affecting food prices. Prices for fruits, vegetables, and rice appear to have continued to fall slightly in March, which should further dampen the rise in inflation during that month. Furthermore, Japan benefits in this case from the fact that gasoline accounts for only 1.8% of the consumer price basket—significantly less than in other countries."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)