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Abe-election 2.0, UK inflation well below 2.0%

by Ashraf Laidi

Abe-election hits yen, UK inflation far from stable

The Japanese yen fell across the board, alongside a boost to the Nikkei, as Japanese PM Abe confirmed the decision to delay the much feared hike in consumption taxes by 18 months and the announcement of snap elections next month.Meanwhile, markets rallied in the hope that the December 14 elections will maintain an LDP majority at nearly five times the expected 8% for the opposition DPJ. Securing a fresh four-year cycle from December would guarantee Abenomics’ hold over the four arrows of stimulative policy, including more asset purchases from the Bank of Japan, whose governor Kuroda was handpicked by Abe.

In comes Fitch et al

Last week we warned that any delay in tax hikes would raise the ire of credit rating agencies over the lack of Japanese fiscal consolidation. Both Moody’s and Standard & Poor’s have not changed their ratings outlook on Japan since 2011, while Fitch’s last change was a downgrade to A+ from AA in May 2012.

But according to remarks from Fitch earlier today, Fitch’s head of Asia ratings said Abe’s delayed sales tax delay was a “significant development” for Japan’s sovereign credit rating profile, and that it plans to complete its review of Japan’s ratings before year-end. Japan is rated A+ by Fitch with a negative outlook, which is one notch lower than the Aa3 and AA- ratings from Moody’s and S&P.

Any downgrade in the rating or outlook would be a fresh boost for yen crosses, particularly against USD, EUR and CAD.

UK CPI stabilises… but far below 2%

Today’s release of the UK October CPI edged up to 1.3% from 1.2%, showing the first rise in four months, helping sterling across the board as it stabilizes fears of deflation. But such analysis is far from reality as the trend not only remains clearly downwards (see chart) due to the delayed impact of the strong pound, falling commodity prices and cooling growth. Let’s not forget Monday’s remarks from BoE Governor Carney to an Australian newspaper expressing “huge disinflationary forces” in the UK. These remarks leave little doubt that the BoE is not only not ready to raise rates before next summer, but is also experiencing a deteriorating inflation picture in the short-term, as was indicated by last Wednesday’s inflation report.

And as UK inflation endures a prolonged decline below the BoE’s 2.0% target, GBP will not be in a hurry to recover.

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