TOKYO: Japan’s core inflation returned for the first time in more than a year owing to increased energy prices, giving signals that the country is on its path to reach its inflation target of 2%.
Even though the unemployment rate dropped to 3%, its lowest level since 1990s, household spending saw a decline of 1.2%.
Increasing inflation is the center point of Japan’s economic growth strategy. The country is placing its bets on rising oil prices and a weaker yen to win its long standing battle against deflation. Expectations of a stronger U.S. dollar are expected to make imports costlier for Japan and to push prices up at home.
Given the current hawkish outlook of the Fed and increased probability of a rate hike soon in the U.S., the yen could go down against the greenback, and prove to be a relief for Japanese exporters.
The sustainability of price gains of domestic production is still unclear due to the declining levels of consumer spending. However, the environment seems to have been set for the economy to battle deflation.
It seems like Japan is crawling toward its 2% inflation target. Given the current outlook for the Japanese economy, higher probability of a Fed rate hike and a weakening Yen, it’s best to obtain a currency hedged exposure to these funds, in order to get exposure to the equities of the world’s third largest economy.
