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Tokyo Headline CPI (NOV) (23:30GMT; 18:30EST)

                                MoM                       YoY

Actual:                   -0.2%                      0.2%

Expected:             -0.1%                      0.5%

Previous:              -0.1% (RL)             0.4% (RL)

How Did the Markets React? 

Japanese inflation data proved to be disappointing in November, as prices continue to fall lower and lower on a monthly basis. Tokyo headline CPI declined 0.2 percent during the month, bringing the annual rate down to 0.2 percent. Furthermore, October’s results were revised 0.1 lower on both a monthly and annual basis, highlighting Japan’s snail-like pace out of deflationary status. Given the complete lack of price pressures on the Japanese economy, the Bank of Japan is left with far less impetus to hike rates 25 basis points in December. However, the BOJ has been keen to suggest that monetary policy decisions are based on the outlook, and not previous results, which does not take a rate increase off the table completely. Nevertheless, today’s CPI data took a large bite out of the yen’s recent strength and left fixed income and equity markets to spike higher upon release.

Bonds - Japanese 10-Year Government Bonds

The posting of weaker-than-expected CPI left JGBs to rally at the market open, but price subsequently remained range bound on the combination of continued duration extension buying and profit-taking. Despite the 5 basis point fall in the 10 year JGB yield to 1.587 percent, the 2 year yield edged down only by a single basis point, suggesting that the CPI data did not really put a rate hike speculation in December or January to rest.





FX – USD/JPY

FX markets showed a much delayed reaction to today’s disappointing Japanese CPI release, and while USD/JPY spiked 15 points higher on the release to 115.85, it took well over an hour for the pair to even start to rally towards a high of 116.36. Yen’s weakness came as a result of diminishing expectations for a rate hike by the Bank of Japan in the near-term. Inflation pressures have been slow to come to fruition, and today’s data highlighted the underlying weakness in price growth. Now that yen has rallied over 200 points against the greenback during the past two weeks, a correction was in store for the USD/JPY pair, especially now that higher rates appear to be off the table for December.

Equities – Nikkei 225 Index

Japanese stocks edged higher today in response to lower than expected CPI for the month of November. The headline Tokyo rate declined 0.2 percent, bringing the annual figure to 0.2 percent from a downwardly revised 0.4 percent in October, emphasizing Japan’s very slow emergence from deflationary status. Although the Bank of Japan has stressed that its policymaking decisions must be forward looking, today’s CPI release provides little impetus for a rate hike in December. Equity traders took kindly to the data, as continually low interest rates should help to weaken the yen, doubling the boost for businesses via lower borrowing costs and cheaper exports. Sony, the consumer electronics and entertainment producer, climbed 0.9 percent to 4,620 yen while Toshiba, the electronics giant, moved up 1.1 percent to 749 yen. Metals shares also gained today on higher commodity prices, with Toho Zinc soaring 3.4 percent to 976 yen and Inpex, Japan’s biggest upstream oil company, advancing 1.3 percent to 1,010,000 yen.

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