BoJ Review: Zero

In the March 18-19 meeting, the BoJ has moved short term interest rate to the 0-0.1% range from -0.1-0% and removed Yield Curve Control. They acknowledged the 2% inflation target can be sustainably reached with current inflation and wage dynamics. ETFs and REITs purchases will be discontinued where corporate bonds' purchase will be phased out in a year. While yield curve control is officially removed, BoJ announced they will be purchasing roughly the same amount of JGB and will intervene if yield spike.  

The move aligns with BoJ's take towards trend inflation and wage. The BoJ has been waiting for results of wage negotiation before policy changes as inflation is expected to remain above 2% in fiscal 2024, with CPI ex fresh food and energy expected to be stubbornly at 1.9% in fiscal 2025, as per BoJ' January outlook forecast. The first round of wage negotiation showed a bigger increase than 2023 with most securing around 5% total pay increase. The overall pay growth will likely surface in early April after the other two rounds of negotiation for small to medium enterprises. From BoJ's eyes, the stronger than expected wage growth will filter into Japan's inflation sustainably. The change in wage and price setting behavior will fuel trend inflation in a medium run. With all three items of CPI above target, BoJ deem it would be a window to exit negative rates before major central banks are expected to ease later in the year. 

However, the key forward guidance has been changed to "Given the current outlook for economic activity and prices, it anticipates that accommodative financial conditions will be maintained for the time being." It seems to suggest the BoJ is in no rush to further tighten under current outlook. The current outlook only see inflation to be above 2% for 2024 before treading below in 2025 and thus it seems reasonable for the BoJ to take its time. Despite headline CPI rebounded in February, we do not see such strength to persevere. Not only global inflationary pressure is fading, the weak domestic demand in Japan will also be dis inflationary in a short run.

Our central forecast sees inflation to be lower than BoJ forecast in 2024 and 2025. We feel the BoJ will be comfortable with the current inflation forecast and at most will increase short term interest rate to 0.1% in the coming quarter, in case CPI spikes. But if headline CPI falls along of forecast, we do not see the BoJ to tighten anymore for the rest of the year.