NIKKEI225 Continues Decline on Higher Inflation, Calls to Protect Yen

Inflation data showed a back-to-back increase in inflation, most analysts had forecast no change.

YoY Core Inflation rose to 2.6% from last month’s 2.5%, for a second increase in a row. The perception is that the BoJ is getting more evidence of a need to hike rates again shortly. This also matches the calls of the digital minister Kono Taro to hike rates to protect the yen.

He’s not the only one, other government officials have also stated that a weak yen pushes up prices for food and energy, impacting households purchasing power.

At the government’s economic council meeting, officials also stated that the government must overlook the impact of a weak yen. Prime minister Kishida also mentioned the need of being alert about the yen’s decline pushing up prices.

The council reduced the forecast for GDP in fiscal year 2024 from 1.3% to 0.9%. The main concern is the impact of demand for exports when the yen has depreciated so much. The council still maintained its forecast for 2025 at 1.2%.

The government believes that widespread wage increases, and tax cuts will boost domestic demand. It seems easy to couple the needs of defending a weakening yen, rising inflation, and calls from officials to take action.

BoJ Meeting

It seems we may get a surprise at the next BoJ meeting at the end of July. Although there have been no hints of a possible move on rates, its well established that the BoJ will take action on rates by reducing the JGB purchasing program to push up yields.

Central bank officials have already met with bond market institutions to determine just how far the BoJ can go. The news will certainly have an effect on the stock market as higher yields will dampen investor-appetite for stocks.

The central bank has said on various occasions that the declining yen is a problem. While the NIKKEI225 has benefitted from the weakening yen as exporters’ stocks have rallied thanks to cheaper prices.

The calls from policymakers for a rate hike and the need from both the central bank and government perspectives are compelling reasons to begin anticipating a rate hike.