BoJ Review: Little guidance ahead

At the October 31 meeting, the BoJ has kept rate unchanged at 0.25% and provide little guidance to future meeting, which seem to be the new norm for BoJ. The BoJ has taken a hawkish tilt in the July meeting and continues to be shown in the quarterly report, citing "Given that real interest rates are at very low levels, BOJ will continue to raise policy rate if economy, prices move in line with its forecast". There is mixed revision in the forecast with ex fresh food & energy CPI higher at 2% y/y in 2024 from 1.9% and ex fresh food CPI in 2025 lower at 1.9% y/y from 2.1%, which on balance will not change our policy forecast. Our forecast of a December 25bps hike did not change despite the lack of guidance due to medium term wage/inflation dynamic. If the BoJ would like to tighten, it would be well rationalized to hike in times of higher CPI in 2024 rather than the slightly lower 2025. The political headwind from new Prime Minister Ishiba have dissipated after he walks back his comment but the aftermaths of October election may complicate the picture as LDP lost majority. 

The July policy tilt has been viewed too hawkish as headline inflation moderates after a brief spike (mostly driven from cost). The household consumption data remains soft at -1.9% in August despite labor cash earning continues to grow strongly at 3% y/y, pointing towards our forecast that Japanese consumer are reluctant towards spending at high price and the shift in business price setting behavior, especially small to medium enterprise, are slow and thus we believe the impact of wage growth towards inflation will be less than BoJ's expectation.. Despite a moderation of headline y/y CPI to 2.6% in September, ex fresh food and energy has risen back above 2%, it suggest there is indeed some underlying strength in inflation and could support the BoJ to stay at the hawkish side of monetary policy. The BoJ expects inflation to be consistently at 2% till 2026.

Wage is likely to continue its above average growth from strong 2024 wage negotiation. Yet it is difficult to see the same magnitude of wage hike in 2025 given the restraint in business earnings, not to mention SME already has difficulty mating bigger firms' wage hike in 2024. The sluggish private consumption in the first half of 2024 will restrain BoJ's steps towards more tightening. The BoJ acknowledged some weakness are seen in the Japanese economy yet expecting the economy to recover moderately. Moreover, PPI continue to stay below 1% four months in a row and is zero in September m/m, further reducing the impetus for business to raise prices.

Looking at the bright side, we do acknowledge the gradual change in wage/price setting behavior which would drive up the Japanese trend inflation in a long run. Our central forecast continue to see inflation lower than BoJ's forecast and see only one more 25bps hike in the December meeting and two 25bps hike in the first two quarters of 2025. In the quarterly report, the BoJ highlighted the FX impact is more significant and pushed firms to change their price/wage setting behavior.