The CPI was higher than expected and is supportive for the BOJ. The markets have already discounted an early end to the quantitative easing policy.
No one's ever seen anything like this. There can be various patterns to the way the Bank of Japan will exit the policy.
Given that producer prices have risen more than 2 percent over the past few months, we have to consider that in Japan's corporate environment inflation is already mounting. Producer price inflation is highly likely to translate into consumer price increases.
Giving a super-clear predictability on the course of monetary policy will not be good for any central bank.
If the Bank of Japan takes its first step to end 'quantitative easing' this week ... we believe that it is unwise to assume that the Bank of Japan will continue with zero interest rates for long after ending its policy.
It is possible that this year will mark the end of the deflation and will bring in a paradigm shift to the bond market next year. Ten-year yields may rise to 2 percent by the end of March next year.
Japan's growth prospects look more promising and we are on the threshold of an end to deflation. Yields are set to increase.
US yields have continued to rise in anticipation of tightening beyond normalization, and we should also prepare for a paradigm shift in Japan as well.
The fact that BOJ acted in the face of resistance from certain government officials and politicians means the market must now focus its attention on the central bank rather than the government.
We expect the core nationwide CPI to rise 0.4 pct year-on-year, for a fourth straight month of non-negative growth.
As the government is growing increasingly receptive to the idea of a policy shift, the central bank could very well change policy as early as March 9.
As the data show, the gap between domestic supply and demand is clearly narrowing, which should create the environment for prices to rise stably.
Although some government officials and ruling bloc lawmakers remain reluctant toward an early policy shift, there are nearly no objections in the private sector, including the banking industry, the insurance industry and business lobbies.
Inflation concerns are going to push up bond yields. Ten-year yields will rise to 2 percent in the first quarter.
The economic outlook favors higher yields next year. The deflationary era has finally ended and a sustainable increase in consumer prices is likely to get underway soon.
