Global Inflation Worries Have Spread to Deflation-Prone Japan

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The global investor fear of a period of sustained inflation has even reached the shores of deflation-prone Japan.

The country’s 10-year breakeven rate -- a bond-market derived gauge of inflation expectations over the next decade -- climbed to its highest since 2018 this week. A slump in the yen and surge in commodity prices have fueled the gain and analysts don’t expect it to reverse anytime soon.

“How far it may rise depends on currency and commodity prices but it looks to remain elevated and a sharp drop is unlikely,” said Shinji Ebihara, a strategist at Barclays Plc in Tokyo. As an energy importer, the advances in natural gas and oil prices feed directly into Japan’s consumer prices, he said.

Read: Favorite Bond Market Inflation Gauge Set to ‘Cross the Rubicon’

An energy price surge that has sent a shockwave through markets is making investors reassess the narrative that post-pandemic price rises are temporary. Longer-dated price expectations are pushing higher in the U.S. and the move in Japan shows even countries that have historically struggled to generate inflation aren’t immune.

Japan’s consumer prices stopped falling in August for the first time in 13 months, ending the country’s longest deflationary stretch since 2011. And with a Bloomberg index of energy commodities up 78% this year, the yen down almost 9% against the dollar and global inflation gauges climbing, price expectations in the East Asian nation are also rising.

“Japan’s breakeven is unlikely to fall immediately as it typically tracks the U.S. breakeven inflation rate which is also on the rise,” said Katsutoshi Inadome, a strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. “U.S. inflation worries are lingering with the rise in commodities prices and supply constraints.”

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