Japan's inflation surpasses forecasts, signals end of negative rates era

Jan core CPI rises 2.0% yr/yr, vs forecast 1.8%, Dec 2.3%

By Ahmed Azzam | @3zzamous | 27 February 2024

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  • Japan's core inflation falls to lowest level in 22 months

  • Japan’s two-year yield climbed to the highest since 2011

European and US equity futures saw a slight decline today, signaling investor caution. The market's eyes are set on upcoming economic data and Federal Reserve officials' comments, poised to shape the interest rate trajectory.

In Japan, a notable rise in the two-year bond yield marks its peak in over a decade, reflecting shifting investor sentiments and potential policy adjustments.

Brent crude maintains its stance above $82, while gold hovers near a fortnight peak, with the market in anticipation of Fed's rate cut timeline.

Yen's modest gains amid inflation data

The Japanese Yen experienced a slight uplift following Japan's higher-than-expected consumer inflation figures. This development fuels speculation around the Bank of Japan's (BoJ) policy direction, hinting at a possible departure from its long-standing negative interest rate policy.

Economic signals stir speculations

With the two-year yield at its zenith since 2011 and steady Nikkei indices, the market is abuzz with predictions. A rate hike seems imminent within the year's first half, with April eyed as a likely candidate. However, today's consumer price index (CPI) surge could prompt an earlier policy shift in March.

Despite the Yen's recovery, it's too soon for a bullish outlook. BoJ Governor Kazuo Ueda suggests a continued accommodative monetary stance, even as negative rates are phased out. The pace of tightening will be gradual, amid global central bank dynamics that could curb Yen's ascent.

Traders now see an 82% chance of the BoJ exiting negative rates by April, a slight increase from previous estimates. This recalibration in expectations stems from the latest swaps data, highlighting the market's keen eye on Japan's monetary policy shifts.