BoJ Review: No change with upward revision in CPI Forecasts

At the April 25-26 meeting, the BoJ kept the short term policy rate at 0.1% and removed some wording in the monetary policy statement (we do not read that as a change in policy). They acknowledged the 2% inflation target can be sustainably reached with the current inflation dynamics and see the inflation target being reached by 2025 to 2026. Some financial market players had speculated about a reduction in buying of JGB, which did not occur. 

The move aligns with BoJ's assessment towards trend inflation and wages. While the results of wage negotiation came in stronger than expected, it takes time to filter into the economy and the willingness of Japanese consumers to accept higher prices is also a key question for medium-term inflation dynamics. For example the latest MOF business survey suggests that 50.2% of SMEs are unable to pass the increased wage costs to customers. Moreover, PPI has been treading below 1% Yr/Yr for the past four months, further decreasing the push for businesses to hike prices. No doubt the change in wages will add to trend inflation in the medium term but its impact may be lower than BoJ's forecast and limit the room for tightening.

In Ueda's press conference, there was nothing new regarding monetary policy. He confirmed underlying inflation is gradually rising and is "extremely" close to reaching their inflation target. The 2024 Yr/Yr CPI ex fresh food forecast has been revised higher from 2.4% to 2.8% and to 1.9% from 1.8% in 2025. With data dependency in the driver seat, we believe CPI will undershoot BoJ's forecast as wage to price pass-through is less than expected and we see only one more 0.1% hike – at the June meeting, given the BoJ tendency to take action earlier than expected. In the FX space, Ueda add to JPY weakness by saying "the chance of a prolonged weakness in the yen is not zero" and that the goal of monetary policy is not pointed toward the foreign exchange rate. However, he did try to cover himself by saying if the exchange rate drives higher inflation, monetary policy maybe adjusted accordingly – though import prices suggest that this is not currently the case. 

Our central forecast sees inflation lower than the BoJ forecast in 2024 and 2025. At most we feel that the BOJ will increase short term interest rates to 0.1% in Q2 (the downward revision of 2024 GDP to 0.8% from 1.2% shows limited room for the BoJ to tighten without potentially bringing the economy towards a contraction). In particular, if headline CPI falls below the BOJ forecast, we do not see the BoJ tightening any more for the rest of the year, beyond the move from 0% to 0.1% in June.