Japan Inflation Will It, Won't It?

Noah Smith brings Japan Inflation back into the discussion:

Anyway, so why is this important? Because for months now, you've been hearing that Abenomics - or at least the monetary policy part of Abenomics - has been a solid success. Japanese inflation, you've heard, is climbing up toward the 2% target. To many people, that is a sign that monetary easing can hit inflation targets if the central bank is really committed to doing so.

The problem is, the Japanese inflation that people are looking at is the Japanese "core" rate, not the "core-core" rate. In other words, those rosy numbers you're seeing include energy prices. And energy prices have gone up, partly because of supply restrictions that are unique to Japan (i.e. restrictions on nuclear power in the wake of Fukushima).

I think it is useful to recall that the markets didn't think Abenomics would work this year (one year ago).  Looking at Japanese inflation indexed bonds, as I did last April showed one year break-even inflation of .35%.  Thus, headline inflation came in considerably higher than expected by the markets one year ago.  That core inflation was still low is pretty consistent with market forecasts.  That is, core is more predictable than the volatile food and energy prices.

I wasn't able to get onto the Bloomberg today, but I expect to see inflation indexed bonds showing that the inflation gains of Japan are pretty persistent.  Last August, the Japanese bond market showed a 1 year break-even of 1.283% and a two year break-even of 1.826%.  I would expect the break-evens to be even higher when I check this week.  If the bond markets are still believing, then so am I.