BoJ Review: Hawkish?

The BoJ hiked by 25bps to 0.5% in the January meeting by an 8-1 vote. The only dissent, Nakamura, is favoring a hike in February. The BoJ cited the alignment of economics development and wage growth with forecast to support their rationale of the rate hike. They also revised ex fresh food CPI inflation higher for 2024 to 2.7% (0.2% higher) and 2025 to 2.4% (0.5% higher) as import prices will be more expensive due to weak Yen. Market participants are viewing the January hike to be hawkish as forecast open the path for more tightening but we are viewing such with a pint of salt.

The December headline CPI has shown a jump to 3.6% y/y with ex fresh food at 3% y/y and ex fresh food & energy 2.4% y/y. However, looking into the details we could see a big chunk of inflationary pressure comes from fuel prices as ex fresh food & energy CPI is 0% m/m. Energy prices are likely to rotate lower with geopolitical tension eases in 2025, OPEC+ cuts expire and a moderate demand growth. Unless the JPY stayed exceptionally weak, import prices may disappoint the BoJ.

Moreover, even when unions are asking for larger than 2024 wage hike, SMEs are unlikely to keep up given their tight profit margin. 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 than BoJ's current forecast.  

In a short run, CPI may remain hot from higher import prices on weak JPY and allow the BoJ to further tighten. But the modest change in business price/wage setting and subsequent consumer behavior maybe more gradual than BoJ's forecast, causing them to overtighten and have to scale back in a medium run. From the latest rhetoric of "If the outlook presented in the January Outlook Report will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.", we see the  BoJ to hike by another 25bps to 0.75% after the early round of the spring wage negotiation in March 2025. Further tightening from there onwards maybe too much for the Japanese economy as the BoJ have already revised the top band of 2025/26 GDP growth by 0.1% lower in their outlook.