BoJ Preview: Reduction in Bond Purchase

At the July 30 meeting, the BoJ will announce their plans in bond purchase reduction over the coming two years and begin to reduce their bond purchase by 1-1.3 trillion JPY to roughly 5 trillion JPY. The BoJ is expected to accelerate the reduction in bond purchase every quarter to 3 trillion JPY in two years. Our central forecast does not see a rate hike in the July meeting, given the current inflationary dynamic and soft consumption. Unless the BoJ make changes to their trend inflation outlook, they will likely tighten step by step and hike in September. Despite headline labor cash earning inches closer 2%, small to medium business found it difficult to match the pace of large enterprises wage growth due to profit margin constraint. Combined with Japanese residents unwillingness to spend, private consumption has been sluggish for the first half of 2024 and dragged BoJ's steps towards more tightening. Our central forecast continue to see inflation lower than BoJ's forecast and see no more tightening for the rest of 2024 unless there is a phenomenal shift in spending behavior for Japanese residents.

The move is aligning with BoJ's assessment towards trend inflation and wages after 2024 CPI forecast was revised to 2.8% from 2.4% in April. Labor cash earning y/y was revised below 2% in previous month (Apirl) and inch closer to 1.9% in May. Wage is still expected to experience accelerated growth above after the historic results from March's wage negotiation. Even if the average wage hike does not meet the historic sub five percent negotiate for large firms employees, a three to four percent wage growth would be sufficient to bring real wage to positive and stimulates consumption. However, Japanese residents are turning to saving instead of consume at higher prices and thus we believe the impact of wage growth towards inflation will be less than BoJ's expectation. Moreover, PPI continue to stay below 1% four months in a row and is close to zero in June (0.2%), further reducing the impetus for business to raise prices.

Our central forecast sees inflation to flare up from wage hikes by a smaller magnitude than BoJ's own forecast and thus expects only one hike of 0.1% in September 2024. Although further tightening cannot be ruled out if wage-inflation translation turns up, the probability is low on consumers' reluctance in higher price and business inability to sustainably hike wages in the coming year.