BoJ review: Pitstop Along the Road

At the September 20 meeting, the BoJ keep rate unchanged at 0.25% and guide there will be more tightening by suggesting the current inflationary trajectory aligns with BoJ's economic forecast in July 2024. The BoJ has taken a hawkish tilt in the July meeting by providing a hawkish forward guidance "If outlook for economic activity and prices are realised, will continue to raise policy rates and adjust degree of monetary accommodation accordingly" and did not repeat this line in the September statement. Instead, BoJ highlighted global economic development and domestic business' wage & price setting behavior as critical area to watch. They also mentioned that the impact of foreign exchange development towards domestic prices is increasing.

The July policy tilt has been viewed too hawkish even when headline inflation approaches 3% by us. As the underlying shows more cost driven than demand driven inflation, further confirmed by the weak retail trade and household consumption data. The September meeting could be viewed as a pit stop for the BoJ before they continue tightening. The move aligns with BoJ's forecast towards trend inflation and wages after y/y July CPI forecast spiked to 2.8% & August CPI reached 3% and Labor cash earning y/y continue to run above 2% at 3.6% y/y in July. Wage is still expected to experience accelerated growth above from 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 households have so far turned towards saving instead of splurge at higher prices and thus we believe the impact of wage growth towards inflation will be less than BoJ's expectation. Japanese residents remain reluctant to spend at high prices even when such behavior has shown signs of change. The sluggish private consumption in the first half of 2024 will restrain BoJ's steps towards more tightening. Moreover, PPI continue to stay below 1% four months in a row and is close to zero in July q/q (0.3%), further reducing the impetus for business to raise prices.

Our central forecast continue to see inflation lower than BoJ's forecast and see only one more 25bps hike in the October meeting and two 25bps hike in the first two quarters of 2025.