Japan’s core inflation ticked up in February, taking the Bank of Japan closer to its 2% target. However, it is still far from the target and lacks an inflationary trend, introducing further uncertainty with regard to when the BOJ might achieve its target.

More Into the Numbers

Japan’s core inflation, which excludes volatile fresh food prices, hit 1% for the first time in three and a half years in February compared with 0.9% in the prior month, per data from the Ministry of Internal Affairs and Communications.It was in line with a forecast by economists, polled by Nikkei. Moreover, the “core-core” measure of inflation, which excludes volatile fresh food and energy prices increased 0.5% year over year in February compared with 0.4% in January.

Japan’s economy grew at an annualized 1.6% in Q4 compared with the preliminary estimate of 0.5%. Bank of Japan’s easy money policies and prime minister Shinzo Abe’s stimulus measures are driving economic growth. Moreover, with inflation still far from the target, the central bank does not seem to be convinced about ending the monetary stimulus anytime soon.

Risks Involved

The recovery in Japan’s economy has been largely driven by a revival in global growth and strong export demand. However, fears of rising protectionism and a rising yen might be drags on the Japanese economy’s future.

A stronger yen is a negative for manufacturers, as it diminishes the appeal of Japanese products to foreigners and leads to a fall in exports. Thus, the recent strength in yen has been weighing on Japanese stocks. For instance, CurrencyShares Japanese Yen Trust (FXY – Free Report) has increased 6.5% so far this year.

Moving on, President Trump has initiated fears of a trade war owing to his protectionist agenda, Trump’s tariff on steel and aluminum imports might weigh on Japanese stocks. Adding to the agony, trade war fears have increased the appeal of the Japanese yen as a safe haven instrument, a further negative for Japan’s manufacturers.

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