BoJ's Door Closing But Window Opens
Since the BoJ moved interest rate to 0% in March, most market participants expects further tightening as it is hard to believe the BoJ would hike once after all these years of ultra-loose monetary policy, in face of higher inflation. However, with headline inflation trading closer to 2%, it seems the door for massive tightening is closing. But with expected stronger wage growth, the window for further tightening remains opened.
Market participants have been closely watching the BoJ for months after they begin to exit the decade long ultra-loose monetary policy. The rhetoric from BoJ officials shows their uncertainty of the next move with current inflation dynamics and their credibility has been weakened since Ueda took office after multiple surprises. Therefore, it would be the best for us to gauge the pace and magnitude of tightening through data.
The April National headline y/y CPI came in at 2.5%, ex fresh food 2.2% and ex fresh food & energy 2.4%. The spike in February has swiftly dissipated and once again inflation is approaching 2%. Moreover, March labor cash earning only grew at 0.6%. It would be a difficult case for the BoJ to build if they planned to hike multiple times only based on "trend inflation" forecast, not to mention preliminary data showing the Japanese economy is in contraction after narrowly avoiding the academical "recession" in the later half of 2023.
The BoJ will likely hike by another 0.1% in June either as a pre-emptive move for expected spike in CPI driven by a wave of wage growth if we see a jump in labor cash earning after the historical hike agreed in March or continue to use the "trend inflation" rhetoric to bring rates higher before the window closes. Apart from central banks will be heading to easing in the second half of 2024, we believe inflation will come in lower than BoJ forecast and would not allow them to comfortably hike multiple times. Despite the price setting behavior setting behavior among Japanese business are changing, the acceptability of Japanese consumers are yet to catch up with household spending (-1.2% y/y) and retail trade (1.2% y/y) both being depressed for the past months. With PPI also peaked in the beginning of 2023 and below 1% for six months, there is less incentive for local business to further increase prices and risk of losing customers. Looking forward, the Japanese economy seems to see limited growth, capping wage hike in the coming year and should see trend inflation treading lower.
Thus, our central forecast are seeing the BoJ to only hike once in June to 0.1%. Further tightening will only happen if we see a sustained jump in the wage and inflation complex.