Naomi Fink, Chief Global Strategist at Nikko Asset Management: Statement on Bank of Japan’s decision to hold rates steady.
The BOJ kept the overnight policy rate on hold at 50bps, as expected, a unanimous decision from the BOJ board. The BOJ’s statement did call out the fact that ex fresh food prices, CPI has been in the 3.0-3.5% range recently. Also significant was the mention that “service prices have continued to rise moderately, reflecting factors such as wage increases”
These two factors demonstrate that (a) the key Core CPI measure is above target and (b) the “virtuous circle” (higher wages feeding through into prices) continues, both supporting ongoing normalization from the BOJ. Moreover, at the end of the statement, the BOJ noted that “exchange rate developments are, compared to the past, more likely to affect prices.”
As we have emphasised many times, the yen remains by many measures under-valued, which in this context, has the potential to contribute to inflation. Any resumption of trend weakening in the yen may be seen, on the balance, as contributing to the need to withdraw accommodation sooner rather than later.
In the subsequent press conference, Gov. Ueda portrayed two sets of opposing factors posing both upside and downside risks to the economy and prices. Among these, domestic factors seemed to point almost universally to the upside. For example, the recent Shunto negotiations resulted in robust wage negotiations, and while ongoing updates to the data will be monitored, Gov. Ueda deemed the result “on the high side” of “on track”.
The BOJ holds that economic growth and prices “on track” with its Outlook merit ongoing gradual withdrawal of stimulus. Shunto is particularly important given that a strong result may provide evidence to “complete” the virtuous circle of wages and prices in that higher prices subsequently lead to successful demands for higher wages, allowing households to weather subsequent price rises by firms. Moreover, Ueda admitted upside risks to inflation, particularly in the form of what appears to be endogenous increases in rice prices, which may in turn give rise to inflation expectations of households.
That said, Ueda also made clear that the BOJ is not yet declaring victory over deflation – that underlying trend inflation still remains below 2% – even despite almost three years with both headline and core measures above the BOJ’s 2% target. One of the reasons of course is the BOJ’s concern over uncertainty in the global economy. As customary among central banks, Gov. Ueda declined to speculate over the extent or impact of US tariffs, but did mention that April deadlines (e.g. the 2 April target for reciprocal tariffs) will be coming up soon, upon which further clarity may be achieved over the impact of such measures. Thereupon, the BOJ’s next outlook report will be due at the April meeting; should uncertainty over US policy resolve in a positive direction (and underlying domestic fundamentals remain robust), the door could be open to a hike.
Yet beyond this remains the June review of the BOJ’s balance sheet policy, during which its plans to gradually accelerate QT by reducing monthly JGB purchases might be revisited, especially given the recent rise in long-term yields. Should at this time, the BOJ decide to ease off on its balance sheet normalization even as domestic fundamentals remain robust, it would be rational to hike rates to show its commitment to continue gradually removing stimulus.
