The Japanese inflation numbers may not be top of investors’ minds, but the implications of the inflation regime shift remain significant. Ex-fresh food Tokyo CPI inflation quickened from 2.44% to 3.38% in April, the strongest rate of inflation in two years. Ex-fresh food & energy, Tokyo CPI inflation also firmed to 3.11%, as services inflation rebounded from 0.78% to 1.97%: education subsidies fell out of the y/y comparisons, and annual rent increases accelerated. National (ex-fresh food & energy) CPI inflation had risen to 2.86% in March and should jump back above 3%, potentially towards the mid-3s, in the coming months.
To be clear, the 2-year JGB yield fell sharply after ‘Liberation Day’ in the US on April 2nd, and though it has since risen back up to 0.69%, it is yet to recover its recent peak (0.88% at the end of March). But by delaying interest rate hikes, the BoJ is capping two-year yields at the expense of the long end of the curve. The 30-year JGB yield rose to 2.70% on Friday. The 40-year JGB yield was just shy of record highs, at 3.12%.
Monetary policy remains too loose in Japan. The recent drop in two-year yields has simply led to a steepening of the yield curve, with superlongs selling off, because inflation is accelerating. The longer inflation remains above target, and the longer the BoJ keeps ‘looking through’ supply shocks that push up inflation, the higher yields will go, to compensate investors for elevated expected inflation and increased volatility in the bond market.
