Preview: BoJ to Announce New Forward Guidance

The BoJ meeting on December 18-19 is going to announce a change in forward guidance by suggest BoJ will be ready to exit ultra-loose monetary policy as trend inflation is in close sight of 2% target. Some hawkish market participants maybe anticipating an immediate hike from the BoJ to bring rates to zero but we feel such a move would be a leap in monetary policy for the BoJ and sending a hawkish message to the market. Even the Japanese core inflation remains stubborn, headline inflation is still on track of gradual moderation after a brief spike in Q3 2023 with higher energy prices and should allow the BoJ to take policy changes step by step.

In an interview with a Japanese media, Ueda stated that the BoJ would be focusing on a "quiet exit" of loose monetary policy when inflation target is met sustainably with wage growth supporting. Over the previous weeks, Ueda continues to spark market participants speculation on a much earlier than expected exit from the current ultra-loose monetary policy as he kept mentioning the term "exit". The change in BoJ's official rhetoric has been previewed by several BoJ officials comment on trend inflation target in sight in the past weeks also. However, one must view Ueda's commitment towards change in policy with a pint of salt as it is based on achieving long term inflation target derived from wage growth, which has yet to accelerate towards 2% for the past months despite historic wage hike in Japan. 

10yr JGB yield has traded in a choppy manner for the past months with a range of 0.6-0.98%, largely mirroring moves in U.S. Treasuries. BoJ has been swift to respond to spikes in JGB yields and announced multiple fixed rate purchase operation spreading across different maturity to keep yields in check. The rise in JGB yields will eventually be inevitable when the BoJ exit ultra-loose monetary policy in the face of higher inflation. Yet, we believe BoJ would intervene in the JGB market whenever there is a spike to smooth the market without a firm stop as 1% is only a "reference" rate. Looking at the trajectory of current development and rhetoric from the BoJ, it looks like BoJ would allow 10yr JGB yield to reach 1% and any further spike would be met with intervention, especially if yields reach 2%.

The Japan headline CPI has shown moderation from peak in the beginning of 2023 with some turbulence inQ3 2023 on energy prices fluctuation yet core CPI remains stubborn and is lingering at 4%. Looking into the details of inflation report, we could see food and energy remains the largest inflationary factor but has shown signs of moderation in the past months. Thus, we would expect headline inflation to further moderate in the remaining of the year and Q1 2024 while core CPI to slow at a slower pace.

Our central forecast for the December meeting will be no change in policy and announcing readiness for BoJ to bring rates to 0% in the coming meeting.