Japan’s Non-Inflation ScareFebruary 22, 2023
The Japanese Government Bond 10-year breakeven inflation has run contra to recent worldwide trends as one of the few sovereign rates of its kind to decline year to date. Where the rest of the world has moved on from a “growth scare” to an “inflation scare” mindset, Japan remains the outlier. Markets simply are not pricing in enough growth in the Japanese economy to justify fears of substantial inflation and higher policy rates.
Due to this tame pricing of inflation by the JGB market, Bloomberg’s World Interest Rate Probability (WIRP) for Dec23 prices Japanese interest rates barely moving higher, having increased only 5bps since the end of January.
While the rest of the world tightens, Japanese monetary policy is expected to be relatively unchanged. With the policy rate set to -10bps currently, the market sees only one roughly 25bps hike by the end of the year. Yet, Japanese stocks have declined in line with other global markets this month on the back of expectations for higher rates.