Forex Flash: Markets begin to show price liquidity trap in Japan – Goldman Sachs

The moves in the Japanese FX and equities have been the biggest change in the macro landscape in the last few months. According to the Economics Research Team at Goldman Sachs, “Here we look at what a successful liquidity trap exit should look like and some ways to benchmark progress towards that. The combination of stable nominal bond yields, a weakening currency and rising equities is fully consistent with the initial stage of any eventual exit from the liquidity trap.”

“To escape the liquidity trap, Japan needs to raise inflation expectations. This is the logic behind the shift in policy and a 2% inflation target. Inflation expectations have already been rising. Although inflation markets are illiquid, we see how the FX market can be used to provide an alternative measure.” The team adds. Both measures show that 30-year inflation expectations may now be as high as 0.75%. However, a fully credible 2% inflation target if achieved would potentially involve even larger asset market shifts.