LIVE MARKETS-Japan's virtuous circle driving inflation higher

Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com

JAPAN'S VIRTUOUS CIRCLE DRIVING INFLATION HIGHER

Japan's rates are pivotal for global asset allocation, yet uncertainty surrounding the recent inflation surge has left market participants on edge, questioning whether the BoJ will further tighten its monetary policy.

Japan has not yet beaten deflation, said Finance Minister Katsunobu Kato in a recent interview with the FT, suggesting BoJ policy should remain accommodative.

BoJ Governor Kazuo Ueda argued that rising food costs and stronger-than-expected wage growth could push up underlying inflation, minutes of their January meeting showed on Tuesday.

"Some economists believe inflation is 'driven by a weak yen and higher commodity costs rather than a virtuous cycle of rising wages and consumer demand'. We disagree," Deutsche Bank strategists say in a research note.

"The empirical evidence suggests that the arguments are upside down: the domestic drivers of higher Japanese inflation are firmly in place and are only vulnerable to an external shock such as a U.S. recession," they add.

They note wages are on track to reach levels not seen since the early 1990s; the yen's weakness is partly due to the BoJ falling behind the curve, while the government and the BoJ have expressed concern about the currency's depreciation.

Bank of Japan policymakers kept interest rates unchanged last week, at their highest level in 17 years.

(Stefano Rebaudo)

TUESDAY'S OTHER LIVE MARKETS POSTS:

VALUATION GAPS CLOSING: EUROPEAN BANKS RE-RATING VS US 'OVERDONE' - JPM CLICK HERE

CTAs SHED $100 BILLION OF STOCKS CLICK HERE

POSITIVE START ON TARIFF OPTIMISM CLICK HERE

EUROPE BEFORE THE BELL: STEADY AS SHE GOES CLICK HERE

RELIEF RALLY STARTS TO FIZZLE CLICK HERE