Japan Flirting With Deflation Again

Japanese inflation could sink to its lowest reading since June 2013 and not far above where it stood when Prime Minister Shinzo Abe won his first election on December 16, 2012. It's two and a half years later now and there is scant evidence to suggest that the era of exceptionally low rates of inflation with multiple episodes of deflation has ended. 

With Bank of Japan Governor, Haruhiko Kuroda recently remarking that the yen was "unlikely to weaken further in real effective terms", markets took it as a cue not to expect further BoJ stimulus soon which would not help headline inflation through yen effects on import prices. No further BoJ-induced yen weakness may, however, stop hurting core inflation since higher import and electricity prices crowded out other types of spending in the context of weak wage gains and tight access to credit. 

There is the opportunity to further clarify the Bank of Japan's position when the minutes to the May 22nd Bank of Japan meeting are released on June 23. 

In light of Kuroda's comments, the risk is that the minutes will be stale. The private version of China's purchasing managers' index for the manufacturing sector arrives Monday evening (NY time). It has been contracting for three consecutive months already, but only marginally. Consensus is forecasting it to budge slightly further away from the April low point and more toward stabilized output, notes Scotiabank.