BoJ Preview: 50-50

In the March meeting, the BoJ will change their forward guidance to they now see trend inflation target being reached and ultra-loose monetary policy is no longer appropriate. It is clear that BoJ think it will be a 50-50 call for a hike in March or April as they emphasize the need to see the result of wage negotiation that is expected to be completed three days before the March BoJ meeting. While headline wage growth reached 2% (a level Ueda mentioned would be favorable for trend inflation to achieve target) and early signs of wage negotiation suggesting higher wage hike than expected (Toyota accepted hike request of 5.5% and multiple unions said at least a 5% hike was accepted by large companies), headline inflation had moderated faster than expectation and there is no rush for the BoJ to tighten policy.

Our central forecast is for the BoJ to change forward guidance in March, indicating trend inflation will be achieving target and ultra-ease monetary policy is no longer necessary and hike interest rate to 0% in April as wage growth has accelerated and the latest wage negotiation is likely to ensure wage continue to growth at an faster pace. Yield curve control has only been existing in name for months, thus it is not crucial when the BoJ officially announce its removal. Given the current development, March maybe the time for the BoJ to scrap the yield curve control policy, along with the change of forward guidance.

While the chance of changing monetary policy remain 50-50 and there is the usual copy and paste rhetoric from BoJ officials, there are indeed some cues we can confirm. First, Boj is going to exit from ultra-loose monetary policy. The latest rhetoric from Ueda and BoJ officials suggest the only obstacle is the pace of wage growth from March's negotiation as BoJ forecast trend inflation to be above or close to 2% until 2026. If wage growth continues to be above 2%, the BoJ thinks it will lead to trend inflation to also be above 2%. From what we have heard from large unions and companies, this year's base pay growth is circa 5% and should be more than enough to support BoJ's exit from ultra-loose. Secondly, chief cabinet secretary Hayashi and other cabinet officials has voiced their assurance in wage growth and trend inflation but they have denied on reports that the Japanese government is ready to declare an end to deflation. However, when there is smoke there is fire. Such "leaks" from local media are mostly accurate, just not officially recognized given the time sensitivity. Combining with remarks from Japanese officials, there is good chance the BoJ has communicated with the government on moving monetary policy soon.

With the current inflation dynamics, we see the BoJ to hike one more time to 0.1% in Q3 after moving to 0% in April. Yet, it depends significantly in the result of wage hike negotiation by the end of this week, especially for small to medium sized firms. An average of 4% base pay growth would be our central forecast. If the average is 5-6% growth in base pay, it may lead to a hawkish tilt from the BoJ.