FOREX: USDJPY Corrective Cycle Extends To 144.00, BOJ Next Week

• Holzmann’s recent comments on defense spending implications are the latest in more regular comments on the matter from ECB officials over the past week or so. Holzmann is characteristically hawkish and has broadly been joined by Muller although the central view appears to be that the inflation impact may not be “that significant” in Lagarde’s words.
• A theme from both sides is that the supply side response will be key.
• EU 5y5y inflation swaps are little changed this week, currently at 2.14%, having reversed about half of their jump higher from ~2.05% in early March to ~2.23% in Mar 5/6 in the aftermath of the fiscal announcements. 

ECB commentary (from hawkish to dovish): 

• Holzmann: A WSJ interview notes he worries the splurge [in Germany’s civilian and defense investments], and similar but much smaller moves elsewhere in Europe, could push inflation higher should there be a lack of industrial capacity to meet the increased demand.  – Mar 26
• Muller: “The debate about public investments, in particular for defense, it means more government spending, again likely to lead to somewhat higher inflation" – Mar 20. Previously had said: " The economic impact of additional defense investments will depend on how much of the necessary equipment is imported and how much of the money is spent within the euro area."  - Mar 7.
• Lagarde: "My suspicion is that markets are seeing [higher German defense spending] as [producing] a growth increase in the future ... Is there a little inflation anticipation associated with that? Probably, but not that significant based on our calculation" – Mar 20
• Villeroy:  The ECB doesn’t necessarily expect Germany’s vast spending boost to fuel inflation because domestic demand remains weak in Europe. He warned, though, that governments must avoid supply bottlenecks. “The German program is a historical game-changer for Germany and for Europe. However, in order for the program to be a complete success, the supply, the capacity to produce, must increase as much as the funding.” – Mar 25
• Rehn [on growth implications]: “"Defense spending would have a rapid impact on growth under an optimistic view, although there are always delays in execution which suggests it would be more over the medium term. Over the short-term expect some growth dampening effects [from US tariffs] before more positive over the medium term" – Mar 18

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