The Bank of Japan likely to stay on hold at its next meeting

Comments from Gregor MA Hirt , Global head of Multi Asset, and Stefan Rittner, CFA , portfolio manager at AllianzGI,?ahead of the Bank of Japan meeting on 15-16 June

• We expect the Bank of Japan to keep its policy unchanged at this week’s meeting.
• We believe the BOJ will have greater visibility on data at the July meeting and will provide updated economic projections, which increases the probability for a policy change at that time.
• Expectations for no change at the June meeting appear well anchored, so market reaction will likely be muted in such a scenario.

The Bank of Japan (BOJ) currently remains an outlier among global central banks. It has so far made no changes to its interest rate despite aggressive hiking campaigns elsewhere. It has only tweaked its yield curve control (YCC) once in December 2022, to improve market functioning and the sustainability of the YCC regime. But this tweak did not represent a departure from its easing stance.

Yet the current environment could lead the BoJ to rethink its position. Inflation in Japan remains at a multi-decade high and the consumer price index (CPI)[1] (excluding fresh food and energy), the BOJ’s preferred measure, has kept accelerating so far to 4.1% year-on-year for April, well exceeding the 2% inflation target. The functioning of the Japanese government bond market remains impaired by the YCC policy. In addition, the shunto[2] spring wage negotiations delivered wage increases of on average over 3.6%, the highest level since 1993 (as of 5 June). Finally, corporate inflation expectations have drifted higher and corporates were willing and able to implement broad price increases, an unusual step in Japan.

At the same time, headline CPI and Tokyo regional CPI show signs of topping out. More critically, in its economic projections published in April,[3] the BOJ expects inflation in the 2024 fiscal year to fall to 1.7% (median estimate), missing its 2% inflation target once again and showing expectations of more transitory inflation. In addition, the BOJ remains unconvinced that the cost-push[4] inflation of the past year has led to sufficiently sustainable domestic inflation dynamics and that recent wage increases are not one-time events. The functioning of the Japanese government bond market remains strained. But it has improved from the depressed levels at the turn of the year as indicated by the BOJ’s survey among market participants, as well as by well-behaved market pricing, so there is also no immediate urgency for adjustments at this time.

In this environment, BOJ Governor Kazuo Ueda has repeatedly pointed out that he believes that the economy still requires stimulus support for the time being and that the risk of moving too soon may outweigh the risk of moving too late. He also launched a comprehensive policy review, which will likely take considerable time to complete.

Therefore, we do not expect the BOJ to make sweeping changes at the June meeting and do not yet expect changes to the key short-term interest rate (currently at -0.1%).

One exception could be YCC adjustments. Governor Ueda, among others, stated that YCC adjustments can only come with little advance guidance and so necessarily need to surprise markets. We would still expect the motivation behind any YCC adjustment to be for the BOJ to achieve greater flexibility going forward and not to use the adjustment to tighten policy. In terms of probability, June still appears less likely to us. Important data will not become available until the July meeting, eg, on aggregate wage developments. Also, new BOJ economic projections are released at the meetings in July and October, which could facilitate explaining changes at those meetings.

All-in-all the BoJ remains on the defensive and seems anchored to the “previous” regime of deflationary risk, which is not surprising considering the very negative impact the later had on the Japanese economy. However, we shall also remember that other central banks – first of all the US Fed – had highlighted the transitory nature of inflation just to be taken on the wrong foot later on. This is the reason why, tactically, we maintain a cautious view on JGB’s at this stage.

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[1] Statistics Bureau of Japan

[2] The annual wage negotiations between enterprise unions and the employers in Japan. Source: https://www.jtuc-rengo.or.jp/activity/roudou/shuntou/2023/yokyu_kaito/kaito/press_no6.pdf?8401

[3] https://www.boj.or.jp/en/mopo/outlook/gor2304b.pdf

[4] Cost-push inflation occurs when overall prices increase (inflation) due to increases in the cost of wages and raw materials

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