Marketmind: Flash in Japan

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever.

All eyes on Friday – not just in Asia but around the world – will be fixed on Japan, specifically the latest inflation figures and the first of two parliamentary confirmation hearings from incoming Bank of Japan Governor Kazuo Ueda.

The importance of Japan on global market flows and pricing cannot be overstated. Japan is the world’s largest creditor nation and a chunk of the trillions of dollars Japanese investors have invested overseas could be repatriated if domestic monetary policy is tightened.

Bouts of Japanese investor repatriation flows in years gone by have had a powerful effect on the yen, dollar and euro, as well as U.S. Treasuries and other government bond prices.

Pressure is certainly mounting on the BOJ to change its ‘yield curve control’ policy of buying unlimited quantities of government debt to cap bond yields, and the cap is coming under sustained attack from markets betting on a near-term interest rate hike.

Ueda addresses the lower house of parliament on Friday and then the upper house on Monday. Assuming he is confirmed, in early April he will replace Haruhiko Kuroda, a pillar of Japan’s ultra-loose policy over the last decade.

Not only are the Fed and many other central banks raising interest rates, it finally looks like inflation has come to Japan. There can’t be too many times in the last 30 years a BOJ board member warned of the risk of an inflation overshoot, but that’s what we got on Wednesday.

Kuroda himself appeared to fan these flames, telling reporters at the G20 finance chiefs meeting in India on Thursday that the BOJ will maintain its easy monetary policy, although he expressed confidence inflation will be back below 2% in fiscal 2023 and 2024.

Economists expect figures on Friday to show that core consumer price inflation rose to a 41-year high of 4.2% in January, up from 4.0% in December and more than twice the BOJ’s 2% target.

It could be a volatile end to the week for markets, with U.S. inflation figures for January also slated for release. On top of that, a sea of red headlines from policymakers will fill traders’ terminal screens – no less than four Federal Reserve officials are scheduled to speak, and the G20 finance ministers and central bankers meeting in India cranks into gear.

Here are three key developments that could provide more direction to markets on Friday:

– G20 finance chiefs meeting (Bengaluru, India)

– U.S. PCE inflation (January)

– Fed’s Mester, Jefferson, Collins and Waller speak

(By Jamie McGeever; Editing by Josie Kao)