How far will the yen depreciate?

Yen continues to depreciate.

The yen fell to the 140 yen level on September 2, the lowest level in 24 years, and then fell to the 141 yen level on the 6th, and then to the 144 yen level on the 7th. .

How far will the depreciation of the yen accelerate at a breakneck speed?

In this column, I will consider "inflationary expectations," which are said to move the yen exchange rate.

(Economics Department reporter Kei Nakazawa)

What is "inflation expectations"?

"Inflation expectations" refer to consumers', firms', and markets' perceptions of future prices.

By "expectation" I don't mean to look forward to inflation, but to anticipate another meaning of expectation.

You might call it "inflation expectations".

The trigger for the yen's depreciation this time was a speech given by FRB Chairman Jerome Powell at Jackson Hole on August 26, and the phrase "inflationary expectations" was used many times in this speech. .

“By many indicators, long-term ‘inflation expectations’ look well anchored. “If inflation continues to be high for a period of time,

it becomes more likely that higher expectations of continued inflation will take hold.”

“In the 1970s, as the inflation has become entrenched in economic decision-making in households and businesses.”

“Inflation feeds on itself. In this speech, Chairman Powell emphasized that "inflationary expectations" that inflation will

remain

high in the future Once it becomes established, there is a risk that it will fall into a vicious cycle in which prices will rise further.

At this point, Chairman Powell said, ``People's expectations of future inflation can play an important role in setting the inflation path over a long period of time.'' It emphasizes an important concept.

An important indicator for forecasting exchange rate trends

Then, where can we get a grasp of “inflation expectations” in the first place?

This is an indicator called the "expected rate of inflation" (also known as the "expected inflation rate").

It is the rate of future price increases predicted by market participants, consumers, and companies.

For example, if we predict that a commodity currently priced at 100 yen will rise to 105 yen next year, the expected inflation rate one year from now will be 5%.

Since it is a forecast value for the future, it has the characteristic of moving ahead of the actual inflation rate and inflation rate, and it is an important indicator not only for Chairman Powell's FRB but also for central banks around the world to judge monetary policy. positioning.

Based on the expected inflation rate, if the view that inflation will further increase spreads, the association will work that the central bank will tighten monetary policy even further.

Looking at this in the case of the United States, the

expected inflation rate rises → the Fed strengthens monetary tightening → the dollar strengthens　

and the yen weakens.

It has become.

Measurement method 1 Questionnaire survey

There are various ways to measure this "expected inflation rate".

First, it is based on a questionnaire survey.

A typical example is the U.S. Michigan Consumer Confidence Index.

Among them is data that predicts the prices of goods and services one year and five years from now, based on telephone surveys of more than 500 households across the United States.

According to the preliminary figures in June this year, the expected inflation rate five years ahead by consumers was 3.3% (confirmed figure is 3.1%), the highest level in about 14 and a half years.

The week after the announcement, the Fed announced its first rate hike of 0.75% in about 27-and-a-half years.

The final figures for July and August, which were announced later, were both 2.9%, showing a slight decline against the backdrop of the recent drop in gasoline prices.

Regarding this, some market participants say that "the rate has not fallen to the bottom despite the fact that the Fed is raising interest rates rapidly."

Measurement method 2 Based on bond market data

The second method of measuring the "expected inflation rate" is the "breakeven inflation rate" commonly known as "BEI", which is calculated based on bond market data.

It is calculated as the difference between the yields of ordinary government bonds and inflation-indexed government bonds.

It may be said that it is the rate of change in prices predicted by the market.

Looking at the BEI in the United States (2010), it remained in the high 1% range until the beginning of 2020, but due to the spread of the new corona infection, it suddenly dropped to 0.5% in March of this year. did.

After that, it followed an upward trend against the backdrop of monetary easing, but it rose further in the wake of Russia's military invasion of Ukraine, and on April 21, it exceeded 3% for the first time since 2003, when data for comparison were available. rice field.

After that, the interest rate fell slightly due to the Fed's interest rate hike, but even after Fed Chairman Jerome Powell made it clear in his speech at Jackson Hole that he would continue to raise interest rates, it is currently hovering around 2.5%.

After Chairman Powell's speech, the Dow Jones Industrial Average plunged in the New York stock market, and the yen weakened rapidly in the foreign exchange market. It has not become

If inflation expectations are not curbed, it could lead to a further rise in the inflation rate.

This is where Chairman Powell is alarmed.

A market insider said, "What the Fed wants is for the BEI to drop visibly to 2% or below, and for a period of time. Looking at the current BEI level, the Fed's It is unlikely that the government will change its stance of tightening monetary policy for the time being."

What are Japan's inflation expectations?

So far, we have focused on inflation expectations in the United States, but what about inflation expectations in Japan?

Japan's BEI (2010) has been fluctuating around plus or minus 0.2% for a long time, but it has risen due to supply chain disruptions due to the spread of the new corona infection.

Following the surge in energy prices after the invasion of Ukraine, it exceeded 1% in May for the first time in about seven years.

Currently, it is hovering around 0.9%.

Kuroda, the governor of the Bank of Japan, showed an extraordinary desire to move Japan's expectations of inflation.

Governor Kuroda took office in 2013 and embarked on unprecedented large-scale monetary easing.

"Through monetary easing of a different dimension, we aim to fundamentally change the expectations of the market and economic agents, and directly raise inflation expectations.

" You can't rely on it like that."

The BEI is calculated from the difference between the yields of ordinary government bonds and inflation-indexed government bonds. It has also been pointed out that this is nothing more than the perspective of those involved.

In addition, the Bank of Japan has curbed interest rate rises with its large-scale monetary easing measures.

For this reason, some market participants have voiced their doubts as to how far the BEI reflects the actual market conditions.

Even when I asked a person related to the Bank of Japan, the answer was that it was difficult to understand Japan's BEI, partly due to market problems.

Regarding Japan's inflation expectations, not only the BOJ but also the market is trying to ascertain trends through various data such as consumer and economist surveys and the BOJ's Tankan = short-term corporate economic observation survey, but all data have advantages and disadvantages. It seems that there is a current situation.

Inflation expectations are an important indicator for monetary policy decisions in both the United States and Japan, but I think the question will be how to improve the accuracy of inflation expectations.

attention schedule

Next week's hottest news is the US CPI for August.

The CPI rose 8.5% in July compared to the same month last year, a slower increase than in June, but inflation remains at record levels.

It is an important indicator to see how much the Fed will raise interest rates at the meeting to decide the monetary policy of the United States held on the 20th and 21st of this month.

On the 16th, the University of Michigan Consumer Confidence Index, which was mentioned in the column, will be released.

Pay attention to the level of the expected inflation rate.