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People are wondering if the money printing experiment in Japan is actually going to be inflationary or not. As we all know, the inflation rate is measured by the CPI (consumer price index). If the CPI goes up, we have inflation.

The CPI of Japan consists of the items given in Chart 1. The items with the most weight in it are food, housing, transportation and fuel. Therefore, it is important to watch food and energy costs as well as housing prices in Japan.

First, let's look at food prices. Zero Hedge reports that McDonald's has hiked the price of a burger in Japan by 20%. If we consider this price hike as a proxy for the overall food price in Japan, we could see a significant increase in the CPI coming.

Second, we take a look at the Japanese housing market. The Japanese housing market has been in a decline for the last 15 years, but now we see signs of stabilization. Housing prices are about to rise in the coming years. In the metropolitan areas for example, we have seen land prices go up at an annual rate of 11.5% in 2012.

Third, fuel and energy costs are going through the roof. With the Fukushima disaster, a part of the nuclear energy had to be diverted to fuel. In fact, LNG imports soared to 86.9 million tonnes. Added to this disaster, the yen weakened considerably in 2013, which led to rising fuel and energy costs. We can witness this in the rising LNG prices in Japan. These events are a very good example of why a weaker yen is not a good thing, instead it creates an environment where purchasing power declines. In this case the price of the imports of fuel are going up and this will add to the trade deficit of the country.

The statistics bureau of Japan recently put out the latest numbers on the CPI (Table 1). Fuel was contributing the most to the rising costs of living.

So basically, we see that the three biggest components of the CPI are going up in Japan. It would surprise me if the CPI were to decline in the coming months.

A historical overview of the CPI index is given in Chart 2. As you can see, the chart is flattening out and I believe we are in for a reversal in the CPI. Inflationary times are on the horizon.

Chart 2: CPI Japan

There is more evidence to be found on the premise of rising inflation in Japan. I talked about the increasing balance sheet of the Japanese central bank in a previous article. In that article I pointed out that Japan's balance sheet is set to expand $530 billion per annum on a balance sheet of $1.8 trillion, which is a large increase considering its GDP. An overview of the three most important central banks is given in Chart 3.

This expansion will be highly inflationary and is already visible in the decline of the yen versus the U.S. dollar (Chart 4). Investors in the CurrencyShares Japanese Yen Trust (NYSEARCA:FXY) have certainly noticed their portfolio drop in value.

(click to enlarge)
Chart 4: USD Vs. JPY

As I noticed in one of my previous articles, there exists a pretty significant correlation between the exchange rate of a country and its bond yields. I expect that Japanese bonds will decline in value (rising yields) together with a decline in the yen. This is contrary to the belief that bond yields will decline because of the bond buying program of the Japanese government. This is also evident from the rising yields in JGB's (Japanese Government Bonds) (Chart 5). Investors in Japanese government bonds should be aware that they take a huge risk holding on to these risky assets. One way to go short Japanese bonds is to buy the inverse of the Japanese government bonds (NYSEARCA:JGBS).

Chart 5: 10 Year Japanese Bond Yield

Investors are finally realizing that money printing is actually bearish for bonds, because of the inflation it causes. We already see cracks in the U.S. bond market as well, as we witness a similar rising U.S. bond yield (Chart 6). Indeed, U.S. bond investors (NYSEARCA:TLT) are scrambling for the exits.

Conclusion

A quick analysis on the CPI of Japan indicates higher inflation to come. Considering the highly inflationary prospects in Japan (and ultimately in the U.S.) I have given some suggestions what to do with your money. Stay out of the Japanese yen and their government bonds as these will decline in value during inflationary periods. The same will eventually happen in the U.S. at a later stage so be prepared for that as well.

Source: Japan Enters Highly Inflationary Period