The CPI was higher than expected and is supportive for the BOJ. The markets have already discounted an early end to the quantitative easing policy.
Inflation concerns are going to push up bond yields. Ten-year yields will rise to 2 percent in the first quarter.
Although some government officials and ruling bloc lawmakers remain reluctant toward an early policy shift, there are nearly no objections in the private sector, including the banking industry, the insurance industry and business lobbies.
No one's ever seen anything like this. There can be various patterns to the way the Bank of Japan will exit the policy.
Japan's growth prospects look more promising and we are on the threshold of an end to deflation. Yields are set to increase.
Given that producer prices have risen more than 2 percent over the past few months, we have to consider that in Japan's corporate environment inflation is already mounting. Producer price inflation is highly likely to translate into consumer price increases.
It is possible that this year will mark the end of the deflation and will bring in a paradigm shift to the bond market next year. Ten-year yields may rise to 2 percent by the end of March next year.
We expect the core nationwide CPI to rise 0.4 pct year-on-year, for a fourth straight month of non-negative growth.
Giving a super-clear predictability on the course of monetary policy will not be good for any central bank.
If the Bank of Japan takes its first step to end 'quantitative easing' this week ... we believe that it is unwise to assume that the Bank of Japan will continue with zero interest rates for long after ending its policy.
