Inflation expectations (CPI this evening) have risen on expectations surrounding Prime Minister Abe’s policies and bold BOJ monetary easing under Kuroda. In developed economies, inflation expectations are often measured using the breakeven inflation rate (BEI) embodied in inflation-indexed government bonds.
And sure enough much has been made of the rise in so-called JGBi's (despite their small notional outstanding and limited liquidity) as indicative that expectations are increasingly creating a virtuous cycle for Japan (encouraging domestic consumers to spend not save). However, while this all sounds jolly good in the headlines, as Goldman Sachs notes, in fact the JGBi market (when adjusted for a planned consumption tax hike in 2014) implies a considerably lower expectation of inflation (around 1%) to 2015 (the end of Abe's predicted 2Y plan).
A BEI reflects average inflation expectations for JGBi residual maturity. A consumption tax hike to 8% (from 5%) is planned for April 2014. Assuming 75% of the increase is passed on in CPI as in the past, we calculate that the BEI excluding consumption tax impact will be only around 1% at the end of fiscal 2015.
Oh well, must need moar money...
Source: Goldman Sachs