BoJ Preview: Lock and Loaded

The BoJ will hike rates to 1% in the June 16th meeting as underlying inflation is sustainably around target range with the help of stronger wage growth. It came at a time when Middle East's dust began to settle and could give the BoJ more comfort. The removal in cost push pressure will allow Japanese business wage/price setting to continue its transition smoother. 

The headline inflation has been artificially suppressed by the extension of energy stimulus and base effect. The initial three months program has been extended twice and will likely run till September. A 3.1 trillion JPY budget has been passed to support the program and will keep headline inflation low for the coming quarter. Underlying inflation should return to above 2% as real wage gains more traction. The latest wage growth is showing above average trajectory, showing the previous miss a speed bump. The positive real wage is going to stimulate consumption and drive the sustainable target in BoJ's eyes.

The key to observe will be on bond purchase program. We believe it is possible for the BoJ to temporarily pause their tapering plans at the end of current plans, 2.1 trillion JPY by Q1 2027. The signal is more important than action for such is targeted at market confidence and keep the JGB market steady. Forward guidance will likely be copy and paste from past meetings yet we see terminal rate at 1% at lest untill the next spring wage negotiation.