BoJ Review: Waiting Till Spring Wage Negotiation

To our surprise, not only the BoJ did not aggressively bring rates to zero percent, they did not even change their forward guidance. Given the latest inflation dynamics, it is surprising BoJ would not seize the time to hint a change of monetary policy. Yet, if BoJ only want to wait for the perfect moment to exit ultra-loose monetary policy, their rationale is still supported by the fact labor cash earning has not reached 2%. While BoJ kept forward guidance "The Bank will continue with Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control, aiming to achieve the price stability target, as long as it is necessary for maintaining that target in a stable manner. It will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner. " intact, the text within the statement has stated "The year-on-year rate of increase in the CPI (all items less fresh food) is likely to be above 2 percent through fiscal 2024", which seems to suggest BoJ do see an exit of ultra-loose monetary policy but is waiting for wage growth to further pick up. 

10yr JGB yield has slumped to 0.61% after BoJ's surprise inaction and kicking the can down to spring 2024. The move in JGB has been largely mirroring U.S. Treasury lately as JGB participants would like to wait before wrong footed by BoJ. Even the current yield level is low and BoJ has turned the 1% cap to reference rate, one will expect the BoJ to intervene in the bond market if yields spike as the BoJ would not like to see that. It is likely we will see a gradual rise in JGB yields throughout the course of coming months as the BoJ inevitably exit ultra-loose monetary policy.

While there has not been changes to forward guidance in the statement, Ueda said in the press conference that the market should forecast a shift in monetary policy (disregarding magnitude) after the spring wage negotiation. The focus of BoJ remain on wage/inflation dynamics as they see current above target inflation not sustainable until wage growth further pick up towards 2%. BoJ is looking for evidence that such wage inflation would be supporting consumption and thus the Japanese economy. It also aligns with BoJ's current forecast of above 2% less fresh food CPI, which is the CPI referred to in the statement's forward guidance. With Ueda publicly saying there would not be changes in forward guidance in January given the limited data to be released, we are only forecasting a change of forward guidance in Feb 2024 and an exit of current policy in Mar 2024. We forecast the BoJ to first move rates to zero percent before completely removing Yield Curve Control. If current inflation forecast remains on track, we could see the BoJ to hike rates by 25bps to tackle stubborn ex fresh food and energy CPI.  And with headline CPI dipping below 2% in Q3 2024, we believe the BoJ would stop at 0.25%.