Japan reaction: Cautious stance from the BoJ

The Bank of Japan (BoJ) maintained the policy interest rate at 0-0.1% at its April meeting, as was widely expected, and stated that it would continue to conduct purchases of Japanese government bonds (JGBs), commercial paper and corporate bonds in line with the decision made at the previous meeting in March. It did, however, remove the part of the statement pertaining to the exact amount of JGB purchases (it previously had stated it would make purchases of around 6 trillion yen per month).

In its accompanying quarterly outlook report, the BoJ revised down its outlook for GDP in fiscal 2024 on the back of the weakness in the latter part of fiscal 2023, though it does expect private consumption to rise moderately over the coming year, given the stronger-than-expected wage negotiations, tax cuts and improving confidence. In addition, an expected pick-up in global demand for IT-related goods is expected to boost production and exports. The BoJ now expect GDP growth of 0.8% fiscal 2024 and 1% in fiscal 2025, whereas it had anticipated growth of 1.2% in fiscal 2024 previously. On the price front, the board expects CPI inflation ex. fresh food to hit 2.8% in fiscal 2024, before slowing to 1.9% in fiscal 2025, compared to its previous expectations of 2.4% and 1.8%, respectively. The upward revision was based on the assumption the output gap will improve and that longer-term inflation expectations will rise as the “virtuous cycle between wages and prices continues to intensify”. The board also state that “in the second half of the projection period, it is likely to be at a level that is generally consistent with the price stability target.”

The monetary policy statement, however, was very short and offered little guidance on the outlook for monetary policy over the coming months. As a result, and also reflecting weaker Tokyo CPI inflation, the yen weakened further, hitting a fresh low 156.77 – its lowest level since 1990, having paused its depreciation in recent days following unified comments made by officials from the US, Japan and South Korea.

It still seems very unlikely to us that the BoJ will respond directly to the weaker currency. Indeed, in the following press conference Governor Ueda emphasized a patient approach to waiting for an acceleration in the underlying inflation rate, accompanied by wage growth and domestic demand, indicating that it is premature for further interest rate hikes. The key still seems to be whether any upward price pressure would feed through to broader inflation and wage growth. On this front, the outlook is mixed. The Tokyo CPI data for April dropped to 1.6%, from 2.4% in March, well below expectations, 2.2%. Some of that was due to the fact school fees were waved in Tokyo in April – an idiosyncratic factor that will not affect broader national CPI - but that only accounted for 0.5 percentage points off the fall, suggesting some genuine broad-based weakness. More broadly, rising wages following the Shunto wage negotiations and ongoing disinflation should start to boost households’ real incomes and therefore spending from Q2. All told, we still think the BoJ will push through one more 10bps hike to its short-term interest rates this year, with a further 20bps by end-2025, but see the BoJ’s current inflation expectations around its target as not pointing to a materially more aggressive adjustment in policy from here. We also expect it to start considering its balance sheet policy towards the end of this year, albeit that any implementation will be unlikely until at least 2025.