BoJ Preview: Showing no hurry
Our central forecast is for the BoJ to remain on hold for interest rate and signals the market they are in no rush to further tighten while allowing trend inflation data to lead policy direction in their forward guidance. BoJ has moved interest rate to 0% and officially removed YCC in March, citing trend inflation likely achieving target. Looking forward, inflation is forecasted to be returning to returning below 2% by year end and does not support the BoJ to aggressively tightens.
In the April meeting, the BoJ will keep interest rate on hold while signalling they are in no rush to further tighten in their forward guidance. The BoJ has cited likelihood to achieve trend inflation as the reason for policy change. The BoJ is forecasting headline CPI to return below 2% by end of year, thus the room for tightening is not significant if BoJ would like trend inflation to be somewhere around their target. National headline y/y CPI moderates to 2.7% in March, with ex fresh food at 2.6%, ex fresh food and energy breaking below 3% at 2.9%. It shows inflation continues to tread lower in Japan, even before BoJ exits negative rate and does not seem to be supporting any aggressive tightening from the BoJ.
Our central forecast is for the BoJ to on hold in the April meeting before another 0.1% tightening in June. By June, the effect of accelerated wage hike should be filtered into the economy and temporary drive inflation higher. The BoJ will likely seize the opportunity to tighten by another 0.1%, keeping inflation in check and allow inflation to be achieved by end of year. We forecast CPI to be lower than BoJ's estimate because Japanese residents will be unwilling to pay a higher price and business will have less pressure to rise prices with PPI below 1% y/y five months in a row. Thus, we believe it is likely 0.1% will be the terminal rate for Japan.
Apart from the price setting dynamics, labor cash earning growth remains a critical factor in the Japanese inflation picture. Labor cash earning has been inching towards 2% before march's wage negotiation (January 1.5% and February 1.8%) and is expected to further accelerate on the strong results of negotiations. The accelerated labor earning will bring real wage back to positive territory and filters into the economy. But its impact will be cushioned by aforementioned factors and Japanese residents turn to saving rather than spending after depleting household saving in the previous year of negative real wage and releasing pent up demand.
With the current inflation dynamics, we see the BoJ to hike only one more time to 0.1% in June. If the magnitude of wage growth and rate of influence towards inflation exceeds expectation, there will be a chance for the BoJ to move further.