Bank of Japan to maintain a hawkish hold at the next meeting

Comments by Gregor MA Hirt , Global CIO Multi Asset at AllianzGI, ahead of the Bank of Japan meeting on 19-20 September 2024

• We do not expect the Bank of Japan (BOJ) to make further policy adjustments in September.
• The BOJ is still assessing the impact of its comprehensive changes in the July meeting on the economy.
• Governor Ueda’s messaging on the BOJ’s confidence in its growth and inflation outlook is the key point to watch before updated figures are released in October. Based on public statements, hints at further policy action appear likely but statements on timing will be vague.

There is a widely held view in the market that the Liberal Democratic Party (LDP) leadership contest, possible early elections as well as market volatility will deter the BOJ from making policy adjustments this year. However, in our opinion economic developments are more important than political schedules and speculative positioning adjustments. While stronger inflation data and positive real wage growth have certainly bolstered the case for additional policy action, yen appreciation and falling energy prices give the BOJ breathing room, as imported cost-push inflation would moderate from here. Moreover, the process of Shunto wage agreements proliferating to broader wage figures is still ongoing and the subsequent next leg of service inflation acceleration is still to be seen. We therefore believe that there is no urgency to act and the BOJ can afford to wait and assess the full impact of its bold July policy shifts before making any further adjustments.

BOJ Governor Ueda’s messaging in the press conference will be the key element to watch. Given public statements by himself and other BOJ board members, we expect an emphasis on data dependency and mentioning of the need to further reduce the currently still very easy monetary policy, e.g. by moderately hiking interest rates. Nevertheless, we do not expect details on the timing to be communicated at this stage. As the BOJ releases its next outlook report in October, we can probably only expect statements on whether the confidence in the current outlook has changed or not.

In this environment, we maintain our key positions, although conviction has decreased due to the risk of some near-term volatility, amplified by yen strength, until markets could settle into the new regime. We are still underweight JGBs. The considerable repricing in global rates has also given a tailwind to JGBs but the reduction in BOJ bond purchases in combination with rate hikes still carries the potential of rising yields. For the Japanese yen, we take a close to neutral stance. While the outlook is generally constructive, JPY momentum may slow once the Fed begins to cut and provides guidance on its intended trajectory, as additional near-term catalysts might be lacking. On Japanese equities, we are still constructive as structural domestic drivers remain in place and the world economy is growing at a sufficient pace. Still, there can be some near-term volatility until JPY and economic expectations have settled in a new range.

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