BoJ Preview: Signaling More Tigthening

At the September 20 meeting, the BoJ will likely keep rate unchanged at 0.25% and guide there will be more tightening in come. The BoJ has taken a hawkish tilt in the July meeting by providing a hawkish forward guidance "If outlook for economic activity and prices are realised, will continue to raise policy rates and adjust degree of monetary accommodation accordingly" and has continued with such rhetoric through multiple BoJ members' remark. The policy tilt seems to be too hawkish despite headline inflation approaches 3% as the underlying shows more cost driven than demand driven inflation, further confirmed by the weak retail trade and household consumption data. Japanese residents remain reluctant to spend at high prices even when such behavior has shown signs of change. The sluggish private consumption in the first half of 2024 will restrain BoJ's steps towards more tightening. Our central forecast continue to see inflation lower than BoJ's forecast and see only one more 25bps hike in the October meeting and two 25bps hike in the first two quarters of 2025.

The move aligns with BoJ's forecast towards trend inflation and wages after July CPI forecast spiked to 2.8% and Labor cash earning y/y continue to run above 2% at 3.6% y/y in July. Wage is still expected to experience accelerated growth above from the historic results from March's wage negotiation. Even if the average wage hike does not meet the historic sub five percent negotiate for large firms employees, a three to four percent wage growth would be sufficient to bring real wage to positive and stimulates consumption. However, Japanese households have so far turned towards saving instead of splurge at higher prices and thus we believe the impact of wage growth towards inflation will be less than BoJ's expectation. Moreover, PPI continue to stay below 1% four months in a row and is close to zero in July q/q (0.3%), further reducing the impetus for business to raise prices.

Our central forecast sees inflation to flare up from wage hikes by a smaller magnitude than BoJ's own forecast and see only one more hike in 2024. But further tightening is likely given the current forward guidance and if wage-inflation translation turns up along BoJ's forecast. A 1% neutral rate would likely be an anchor point for now.