Japan CPI, China Loan Prime Rate


Early next week there are two data points from the Far East that are important to talk about more from a technicals perspective. That is, they are not expected to cause an immediate move in the currency markets, but do provide some important insights into where currencies could be headed. And that based on certain fiscal and monetary technicalities that can move markets in certain circumstances.

The economic situation in Asia is particularly complex at the moment, with direct intervention by the two largest governments in the region. The Japanese government is seeking to prevent the yen from becoming too weak, and the Chinese government has significant control over an economy under the strain of a covid-lockdown. That’s why these kinds of government policy technicalities can have such a big impact on the currency.

Why inflation doesn’t matter in Japan

Japan’s CPI is expected to move up to 2.7% of 2.4% previously, but this is not expected to impact the market that much. That’s because there is unanimous agreement that the BOJ will not change policy at its next meeting later in the week. Even if headline inflation is above target, and despite decades of trying to raise inflation.

That’s because the inflation that Japan is experiencing is the “wrong” kind of inflation. It is not driven by increased money circulation from economic growth, but a combination of higher global costs and increased import prices from a weak currency. While raising rates would help reduce some of the impact of inflation, it would come at the cost of hurting an economy that is already not very healthy. The BOJ would very much like to continue to relax, and use other means to address the problem. How to prevent the yen from weakening too much through government intervention, as explained earlier.

China is sorting things out

The Lending Rate is one of the main tools of the PBOC for monetary policy, especially to support the economy. It adds up the interest rate of 1-year and 5-year debt, and sets the interest rates for the financial system. It is not the same as interest in other countries, because it is not applied to government debt, but a private loan. It is an important tool to regulate the cost of credit.

The lower the rate, the more support the government seeks to provide to the economy. But, it comes at the cost of profit for the banking sector, which in turn leaves the financial markets a little more vulnerable. The rate is now at a record low level, just cut a few weeks ago.

What to expect

Yesterday the Chinese statistics bureau said it expects a rebound from low demand. And they also said something that is probably key to future monetary policy action: That core CPI could rise, especially if the covid situation improves. This means that it is less likely that the Loan Principal Quota will be cut.

The wider implications of this are companies will not have access to lower cost credit in the future. That could mean less imports of machinery from Japan, and goods from Australia and New Zealand.

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