Forex Flash: The repercussions of the recent JPY upswing – UBS

FXstreet.com (Barcelona) - According to Research Analyst Gareth Berry at UBS, "The recent USDJPY upswing over the past two months yields several insights - first, FX investors who had priced-in mild Japanese deflation for years to come have suddenly had to revisit that assumption, and secondly, even those who doubt inflationary pressures can take root in Japan freely concede that faster BoJ asset purchases will likely induce yen weakness (whether inflation follows or not)."

Inflationary expectations tend to be self-fulfilling - if the population believes inflation will rise, behaviors change: consumers spend now to avoid higher prices later on; employees push for larger wages now to cope with a higher anticipated cost of living. So FX investors should watch Japanese inflation expectations closely.

That's why the BoJ's survey of household inflation expectations is so important. The latest quarterly edition appeared over the weekend - and it showed no significant increase in household inflation expectations "Admittedly, the survey was carried out before the Dec 16th general elections, so we keenly await the next survey in three months - if expectations for future inflation remain subdued then, FX investors may wonder if the USDJPY has travelled too far too quickly." Berry adds.