Well after last night’s Japan Corporate Services Price Index rose 0.3% in May, its best reading since 2008, all signs are pointing to that inflation may rise but probably it is too early to say how close it will get to the central bank’s goal.
The Japanese yen gained momentum yesterday as risk off hit the equity markets, However, institutional traders are eagerly waiting for this sell-off to subside so they can jump back on their favorite trade. Short the currency with unlimited stimulus and go long the one planning on reducing it.
Yesterday, Governor Kikuo Iwata tried to calm the markets. He explained that the violent moves in market volatility over the last month have not created a panic at the BOJ. The Nikkei fell from 16020 to 12,310 while Japanese yields soared higher. Mr. Iwata explained that they are sticking to their plan and if they increase their stimulus he would support the purchase of more Japanese government bonds over riskier assets.
The one problem is that risk-off is still relevant. Jumping back on the USDJPY trade needs a more cautious approach. Europe is one good story away (or half a percentage point on Spanish yields) from returning us to the chaos that occurred before last July. The China credit crunch story should subside, but any perils in this large economy will not help the commodity currencies and thus provide no support for yen weakness. Eventually, we will see 105, 110 and higher on USDJPY, but the downside risk is still high in the short-term.