A commentary by Naomi Fink, Global Strategist at Nikko Asset Management on the Bank of Japan’s latest decision.
As widely expected, the BOJ kept rates on hold (unchanged) at 0-0.1%. The decision was unanimous. The innovation this time looks to be the higher headline CPI forecast of 2.8% y/y (vs. 2.4% prior); in line with this forecast, the BOJ expressed that risks to prices were skewed to the upside.
The forecast, very clearly in the upper 2% range, opens the way to future rate hikes given, of course, that the “virtuous circle” stays intact. We will be very watchful of April wages, which should be the first month where wage rises reported by Rengo (of over 5%) might be reflected in the data. We also remain watchful of follow-up announcements on subsequent wage releases. The key to the “virtuous circle” remains positive real wages, and higher-than-expected inflation would challenge this virtuous circle. Only in the event inflation is eating into real wages, this is an argument for greater central bank hawkishness.
Governor Ueda’s statement is still upcoming this afternoon and markets remain on high alert for any indication of whether the yen’s current weakness will be interpreted as a lasting inflationary signal and invite more hawkish rhetoric from the central bank. The BOJ however is likelier to find any knock-on impact from yen weakness upon inflation (and therefore real wage growth) as more concerning than short-term currency moves. Prolonged currency weakness of course, is a longer-term phenomenon than short-term swings. Therefore, the currency’s moves may be interpreted in the perspective of whether the direction is seen as likely to persist over the fiscal year, and erode consumers’ purchasing power, despite their newly lifted nominal wages.
Meanwhile, BOJ also dropped the wording on buying the same amount of bonds as before; this is significant in that it also leaves the door open to some degree of removal of stimulus by curtailing purchases even as currently held bonds mature.
The GDP forecast (current) for 2024 was downgraded to 0.8%, which appears to have been due entirely to inflation eroding real growth, but expected to revert to 1% both one and 2 periods out, which indicates transitory damage to real growth from elevated inflation.
From the press conference
As expected, BOJ Governor Ueda indicated that while the yen’s current level is not yet having a large impact on underlying prices, yen weakness was one factor that influenced the revision upward in the 2024 fiscal year inflation outlook. This is consistent with the idea that yen weakness becomes a worry if it is persistent enough to influence the household’s purchasing power for a prolonged period even despite wage increases.
We must bear in mind meanwhile that dollar-yen has also been influenced by US data and its implications for the Fed policy outlook – now, it appears as though many of the rate cuts that were initially priced in for 2024 have been priced out. However, there are sectors in which underlying inflation is decelerating, and as such it may be a surprise if inflation declines once again to a level consistent with pricing in rate cuts, which would in turn render USDJPY vulnerable to a correction.
Naomi Fink
Global Strategist
Nikko Asset Management
