Friday, August 23, 2013

Japan Data Update

By Charlie Clarke

In April, I did a post showing inflation expectations data in Japan that come from Japan's Inflation indexed bond market.  At the time, the data showed that over the next year, inflation would be a small .35%, while over two years, it would be a much higher 1.34%.  Since two years is an average between .35% and the second year, that means the second year's inflation expectations were a substantial 2.33%.

I thought it was time to update.

The 1 year breakeven rate is up to 1.283%:

The 2 year breakeven rate is 1.826%.

The implied second year rate is 2.36%.

The market expects Japan to start experiencing inflation this year.  Both market forecasts from last post and this post could be right, if inflation is moderate until March or April and then starts rising pretty quickly.  Though it is not necessary to read them together like that, as the time path of inflation may have changed.

What I am struck by is that the market said QE in Japan worked.  It dramatically raised expected inflation in Japan.  Look at the big spike in March 2013 of the two year graph.  Yet, the market predicted that nothing would happen for about a year.  It, essentially, predicted that everyone watching actual measure inflation would think QE was having no effect.

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