Bulls bank on Japan inflation cooling further

Jan 19 – The number one focus for investors in Asia on Friday will be the latest Japanese consumer inflation figures, with markets across the region hoping to draw support from the strong rise on world markets the day before and end a torrid week on a high.

The MSCI Asia Pacific ex-Japan index is down 3.7% this week, on track for its biggest weekly loss since August. After jumping 6.6% higher last week for its best performance in nearly two years, Japan’s Nikkei is also in the red.

But only just. A soft inflation number that raises more questions about the Bank of Japan’s policy normalization and eventual move toward positive interest rates could be the catalyst for a Friday buying frenzy.

Japan’s annual headline rate of inflation crossed above the BOJ’s 2% target in April 2022 and has been there ever since. The retreat from its 4.3% peak a year ago has been slow, and in November it had eased to 2.8%.

A sizeable decline in December would add to the weight of evidence that price pressures are lifting. This has prompted many investors and analysts to question how quickly the BOJ will normalize policy and lift interest rates into positive territory.

Economists expect annual core inflation to cool to 2.3% from 2.5%, which would be the lowest since June 2022.

Weaker-than-expected machinery orders and recent dovish comments from BOJ Governor Kazuo Ueda have pushed the yen back down toward the 150.00 per dollar level. It is down 5% so far this month, on for its biggest monthly slide since June 2022.

None of the 29 economists in a Jan. 9-16 Reuters poll expect the BOJ to raise its short-term deposit rate of minus 0.1% at its policy meeting next week. That is down from 14%, or four of 28 economists, who expected a change in a December survey.

More broadly, risk assets rebounded on Thursday after days of being beaten down, as the recent surge in global bond yields slowed down dramatically and a renewed bout of optimism around AI boosted tech stocks.

US-listed shares of Taiwan Semiconductor Manufacturing (TSMC) were among the biggest winners on Wall Street, jumping 8% after the world’s largest contract semiconductor maker projected 2024 revenue growth of more than 20%.

The yuan also goes into the last trading day of the week on the defensive, at a two-month low against the dollar, but a weakening domestic currency is not having the positive impact on Chinese stocks like it is in Japan.

Here are key developments that could provide more direction to markets on Friday:

– Japan inflation (December)

– New Zealand PMI (December)

– Malaysia trade (December)

(By Jamie McGeever; Editing by Bill Berkrot)