BoJ Review: Pushing Hikes to July, if any

At the June 13-14 meeting, the BoJ has surprised the market again with no change to rates nor bond purchase program despite Ueda's hints and multiple "source" reports. However, they do suggest the planning for bond purchase cut will be decided in July. Labor cash earning has risen above 2%, along with the latest rebound in CPI should be enough to support BoJ's decision to hike or cut bond purchase. Indeed, the statement recognized CPI is above target range and would continue to be higher in 2025 but the weak Q1 GDP, indicating a weaker Japanese economy, seems to be dragging the BoJ from faster tightening. Our central forecast continue to see inflation to be lower than BoJ's forecast for we suspect Japanese residents will be unwilling to accept higher prices even when real wage approaches positive. Given the current inflation dynamics and BoJ's attitude, we forecast there will be only be 10bps hike in July 2024.

While the move could be rationalized by BoJ's assessment towards trend inflation and wages, it does not fare well with their outlook. Labor cash earning y/y rose above 2% to 2.1% in April as wage growth began to accelerate 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 showing resistance to 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, further reducing the impetus for business to raise prices. All of these factors points towards a tight window for the BoJ to tighten for the BoJ sees CPI to tread below 2% in 2025.

In the latest comment from Ueda, he mentioned that "If underlying inflation moves as we project, we will adjust degree of monetary support" and "As we move towards exit from massive monetary stimulus, it would be appropriate to reduce bond purchases: It made the market believed that rate hikes and bond purchase reduction are in BoJ's consideration after being echoed by Nakamura, a known dove. Forward guidance from the BoJ has its credibility significantly tarnished after multiple surprises and could have negative impact in the future.

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 July 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 leading to lower inflation in the coming year.