USD/JPY has edged lower in the Tuesday session. In North American trade, USD/JPY is trading at 113.63, down 0.22% on the day. In the US, inflation indicators were stronger than expected. PPI gained 0.4%, above the estimate of 0.1%, while Core PPI also came in at 0.4%, beating the forecast of 0.2%.Later in the day, Japan releases Preliminary GDP, with an estimate of 0.4%.
US Producer Price Index reports were stronger than expected in October. Core PPI and PPI remained unchanged at 0.4%, beating their estimates. PPI increased at an annualized rate of 2.8%, its fast gain since February 2012. Is inflation on the rise? We could get an answer as early as Wednesday, with the release of CPI and Core CPI reports. Inflation levels are being closely monitored by the Federal Reserve, as stronger inflation levels would likely result in a rate hike in early 2018. The markets are very bullish on higher rates, with a December hike priced in at 91% and a January raise priced in at 89%.
Prime Minister Shinzo Abe cruised to victory in the October election, and is expected to maintain his 'Abenomics' economic program. The program is based on three prongs – ultra-loose monetary easing, fiscal spending and structural reforms to the economy. The scheme has been in place since 2012, and is finally showing some results, as the Japanese economy continues to expand. However, inflation remains stubbornly low, and a strong labor market has not led to higher wages, which would help boost inflation. Companies continue to look for ways to spend their cash, such as buying foreign companies, but are reluctant to plow more funds into wages. Business confidence in the economy remains lukewarm, and businesses are reluctant to add to their fixed costs. The BoJ has urged companies to increase wages, but this is unlikely to occur until the business sector is convinced that the current economic rebound will be long-lasting.