BoJ Review: A nothing burger

At the December 18 meeting, the BoJ has kept rate unchanged at 0.25% and there is no forward guidance just like previous statement. The BoJ had taken a hawkish tilt in the July meeting, which continues to be shown in the quarterly report, citing "Given that real interest rates are at very low levels, BOJ will continue to raise policy rate if economy, prices move in line with its forecast", but it seems that the pace of action from the BoJ is slower than their words as we have seen no policy nor forward guidance change from the BoJ since July. There is also a "Review of Monetary Policy from a Broad Perspective" released along the December statement, analyzing the past policy and its impact towards the Japanese economy. There is a lot of information in the 212 pages report, but in short it concludes that it is right for the BoJ to target "a price stability" at 2%, should be keeping real interest rate above 0% so there are room to stimulate when the economy downturn. Yet, none of these are forward guidance. The rhetoric of data dependency persists and the key lies in wage/price dynamic. We now see only one 25bps hike in Q1 2025 and terminal rate at 0.75% by year end 2025.

Looking backward, we are right that the July policy tilt is too hawkish. As headline inflation moderates and household consumption data remaining soft, the tilt from BoJ can hardly be justified and they seems to have overhyped the market in speculating more tightening when data does not allow them to do so. Our forecast of Japanese consumer's reluctance towards spending at high price stays true and the shift in business price setting behavior, especially small to medium enterprise, continue to be slow. Thus, we believe the impact of wage growth towards inflation will be less than BoJ's expectation, especially SMEs are already having a hard time catching up the pace of wage growth from large enterprise. The headline wage growth will likely steadily above 2% in 2025 but likely union will be disappointed with their call for another historic wage hike, unless the new government budget has concrete measures to help small business owners. 

The Japanese economic picture is also hindering BoJ's step. Private consumption has been weak in 2024 and the recover after contraction in Q1 is sluggish. With the forecast of gradual pickup, the BoJ may have to assess the impact towards the broader economy as they decided to step ahead too fast. The gradual pickup in growth will likely be supportive for BoJ's further tightening but we are afraid the window to bring terminal rate to higher ground is diminishing. While there is a certain level of underlying strength in core inflation, it is likely for inflation to tread lower in 2025. The rise in trend inflation BoJ envisioned will only be seen slowly over the coming years as Japanese residents and business adapt to the new wage/price dynamic.

The lack of forward guidance has sway market pricing meeting from meeting as there is little cue what is to come. We think the BoJ could hike at least once in Q1 2025 if there is early positive sign of 2025's wage negotiation and could bring rates to 0.75% by year end. However, if the BoJ is taking it slow and decided to only hike after the result of 2025 wage negotiation, it meant the BoJ is not confident in their own forecast and could see rates staying at 0.5% for 2025 before following the slow grind in higher trend inflation.