BoJ Review: Ueda Hinting April Move

In the February meeting, the BoJ did not change monetary policy nor forward guidance with their rationale being labor cash earning not supporting a 2% sustainable inflation target. And in fact, the latest November headline labor cash earning is only showing a 0.2% growth, which aligns with BoJ's decision to wait for spring wage negotiation to confirm wage - inflation dynamics. The BoJ kept forward guidance "The Bank will continue with Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control, aiming to achieve the price stability target, as long as it is necessary for maintaining that target in a stable manner. It will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner. ", the text within the statement has stated "The year-on-year rate of increase in the CPI (all items less fresh food) is likely to be above 2 percent through fiscal 2024", which seems to suggest BoJ do see an exit of ultra-loose monetary policy but is waiting for wage growth to further pick up, which is to be confirmed in spring. Despite the BoJ revised fiscal 2024 less fresh food CPI to 2.4% from 2.8%, it remains above 2% and does not change our monetary policy forecast.

While there is no fireworks in the BoJ statement, Ueda's press conference are more informational. His rhetoric in "Likelihood of achieving 2% inflation" turn to "gradually rising" and suggest their "confidence has grown in achievement of price target". He is signalling there is more confidence in wage growth in as more big firms had decided to hike wage this year. The focus of BoJ remain on wage/inflation dynamics as they see current above target inflation not sustainable until wage growth further pick up towards 2%. BoJ is looking for evidence that such wage inflation would be supporting consumption and thus the Japanese economy. It also aligns with BoJ's current forecast of above 2% less fresh food CPI, which is the CPI referred to in the statement's forward guidance. Specifically, Ueda hinted that the next move in policy will be in April as they suggest they will have more data at April meeting compared to March. Moreover, Ueda restated that even if real wages are negative, a policy change is possible.

We are forecasting a change of forward guidance in March 2024 after the wage negotiations to suggest another round of above target wage growth, and an exit of current policy in April 2024. We forecast the BoJ to first move rates to zero percent before completely removing Yield Curve Control. If current inflation forecast remains on track, we could see the BoJ to hike rates by 25bps to tackle stubborn ex fresh food and energy CPI.  And with headline CPI dipping below 2% in Q3 2024, we believe the BoJ would stop at 0.25%.