Japan: Strong yen and cheap oil likely to exert downward pressure on inflation - Nomura

Analysts at Nomura expect the Japanese core inflation rate to rise to nearly 1% y-y toward the end of the year on the back of higher prices of energy and of goods and services.

Key Quotes

“These forecasts assume that USD/JPY will rise to around 120 and the price of crude oil to around $55/bbl by the end of FY17, with higher import prices pushing up the price of a wide range of goods. However, if the yen appreciates more than we expect or the price of crude oil fails to rise as much as we expect, the core inflation rate is more likely to undershoot our forecasts.”

“The core inflation rate is to rise through the end of 2017. This is because exchange rate fluctuations tend to impact the inflation rate with a time lag and the boost to prices from the period of yen depreciation seen through 2016 is likely to be sustained. As that impact drops out of the picture, however, inflation is likely to start moving downward in 2018 and, if USD/JPY hits 100, we cannot rule out the possibility that the core inflation rate could move into negative territory.”