Forex Flash: USD/JPY buying rational runs deep – UBS

FXstreet.com (Barcelona) - Investors have bought the USD/JPY this year for many reasons. “However, the prospect of the Bank of Japan hitting its new 2% inflation target within two years is one of those reasons – luckily it is not the only one, because generating and then sustaining a 2% inflation rate in Japan seems challenging to say the least.” Notes Research Analyst Gareth Berry at UBS. Even Prime Minister Abe who initially championed the cause conceded yesterday that the target might not be reached at all.

Peering into the components of the CPI basket we can see why. To maximize chances of success, somehow the BoJ needs to focus its efforts on those categories in particular.

The yen's sharp decline against the dollar since November will help here. 'Imported inflation' on the back of sudden currency weakness should be enough to generate an inflationary pulse. We can already see the first signs of this as gasoline prices are up 6.4% since parliamentary elections were called in November, and prices now approaching a 12-month high.