Flash: Shrinkage of Japanese inflation differential hints at changing sentiment - Nomura

FXstreet.com (London) - Nomura Strategist Yujiro Goto notes that the shrinkage of the inflation differential may be regarded as another sign of changing sentiment.

USD/JPY to react to lower inflation

He sees that persistently lower inflation in Japan justifies JPY appreciation if people assume purchasing power parity holds. He writes, “While inflation expectations based on inflation-linked bonds are now declining slightly, a gradual rise in inflation expectations may break the vicious cycle of deflation and JPY appreciation.”