BoJ Preview: Placeholder Meeting

The BoJ will keep rates unchanged at 0.5% in the March meeting with no change to forward guidance. The 25bps January hike is clearly in response to the jump in both headline CPI and wage in Q4 2024 and potential momentum towards 2025. While preliminary Q1 data seems to suggest hot CPI and solid wage hike, the BoJ will likely wait for the result of the spring wage negotiation before taking another step. While early negotiation result is suggesting a stronger wage (5-6%) for a few large enterprise, SMEs that accounts for a big chunk of employment will be unlikely to catch up with the magnitude of larger counterparts, due to their more traditional tendencies. The BoJ would like more positive signals coming from those SMEs before they can confidently see a sustainable growth in the inflation/wage dynamics. Moreover, the forward guidance will be unchanged with a hawkish bias but no concrete action plan.

The January headline CPI remains red hot at 4% y/y with ex fresh food at 3.2% y/y and ex fresh food & energy 2.5% y/y. The inflation picture is showing energy & food are carrying the most inflationary weight but the underlying inflationary pressure cannot be omitted. The underlying inflation will likely linger in H1 2025 as the weak JPY has pushed up the import cost before gradual correction. Energy prices are likely to rotate lower with geopolitical tension eases in 2025, OPEC+ cuts expire and a moderate demand growth. 

The result of spring wage negotiation will be critical in determining the pace of BoJ's hike. SMEs were already lagging behind the wage growth of larger business and will likely stay that way until the gradual change in business price setting behavior accumulates to a certain extent. Combined with the slow acceptance/reluctance for Japanese consumers to consume at high price, the incoming inflation picture is likely to be cooler in a medium timeframe.  

In a short run, CPI may remain hot from higher import prices on weak JPY and allow the BoJ to further tighten. But the BoJ will wait for confirmation after first wave of wage hike post-spring wage negotiation and hike by another 25bps to 0.75%. Further tightening from there onwards will depend on the devlopment in the inflation/wage dynamics. It is possible for the BoJ to bring rates to 1% if the current development persists.