Investment Institute

Alertas de mercado

Japan reaction: Hawkish tone, but weak economic backdrop will keep a lid on hikes this year

31 Julio 2024 (3 min de lectura)

Escrito por

Gabriella Dickens

G7 Economist – Macro Research

KEY POINTS

The Bank of Japan unexpectedly voted 7:2 to encourage the uncollateralized overnight call rate to rise to around 0.25%, from between 0.0% to 0.1%

The BoJ sounded more hawkish in its accompanying statement, noting that it would continue to raise its key policy rate if the economy continued to develop in line with its forecasts

We think the recovery in GDP will undershoot expectations, though, due to a sluggish recovery in private consumption, so expect the BoJ to wait until Q1 2025 to push through the next hike to 0.5%.

As expected, the Board also laid out its plan to reduce its JGB purchases by around 400bn yen each quarter. That would reduce the bond purchase program from its current pace of around 5.7trn yen to 4.9trn by end-24 and 2.9trn by Q1 26

As expected, the Bank of Japan (BoJ) unanimously voted to reduce their purchases of government bonds at July’s meeting by 400bn yen per quarter, reducing the overall pace from around 5.7trn yen currently, to 4.9trn by end-2024 and around 2.9trn yen by end-25. Less anticipated, however, was the move to increase the target for the uncollateralized overnight call rate – the Bank’s key policy rate – from 0.1% to 0.25% at its July meeting, with a vote split of 7:2. The Board highlighted the fact that economic activity and prices were “developing generally in line with the Bank’s outlook” and that wage increases appeared broad based. In addition, import prices are again rising on a year-on-year basis, an upside risk the statement noted required attention. Then Bank, however, did reaffirm that real interest rates are expected to remain significantly negative and that “accommodative financial conditions will continue to firmly support economic activity.”

Regarding the outlook, the BoJ struck a more hawkish tone than in recent statements, noting that the policy interest rate will continue to increase, and the degree of monetary accommodation adjusted if the outlook presented in the July Outlook report is realised. Note that Bank of Japan revised down its forecast for GDP growth in FY24 by 0.2 percentage points to 0.6% but left its FY25 forecast unchanged at 1%. And on the price front, the BoJ revised down its forecast for CPI ex. fresh food inflation by 0.3ppt to 2.5% in FY24 and revised up its forecast for FY25 by 0.2ppt to 2.1% but left its forecasts for CPI ex. fresh food and energy unchanged at 1.9% in FY24 and FY25.

Are further hikes on the horizon then? We think the answer is a cautious yes. While the outlook for CPI inflation is broadly in line with our forecasts – with higher wage costs and import prices applying upward pressure to underlying inflation over the coming quarters – we think there are downside risks to the growth outlook. Indeed, we see a risk that the recovery in private consumption is sluggish, even once real incomes start to rise again in the second half of the year, as ongoing caution in the face of higher prices means households save at least some of the additional cash. As a result, we think the BoJ will struggle to increase the policy rate by 25bp this year, instead waiting until Q1 2025, leaving the uncollateralized overnight call rate at 0.25% end-24 and 0.5% end-25. Of course, if the economic data come in stronger than we anticipate, further hikes in 2025 are on the cards.