Bank of Japan Governor Kazuo Yoda arrives for an interview with a small group of reporters in Tokyo on May 25, 2023.
Richard A. Brooks | AFP | Getty Images
Analysts are divided over the Bank of Japan’s move after the country’s core inflation came in above the central bank’s 2% target for the 15th consecutive month.
CLSA Japan strategist Nicholas Smith believes the BOJ has been “misstepping” on inflation.
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“They see the Fed saying that inflation is temporary, and they’re going to be fooled into doing that,” Smith said in an interview with CNBC’s “Street Signs Asia.”
“They decide to ignore it and continue to forecast 1.8% inflation this fiscal year. Inflation has been above 2% for 15 months in a row.”
The center of Japan The Consumer Price Index rose 3.3 percent year-on-year. In June, in line with economists’ expectations in a Reuters poll and slightly higher than the 3.2 percent recorded in May.
Core inflation in Japan excludes fresh food prices from the overall consumer price index. Inflation came in at 3.3 percent in June, up slightly from the 3.2 percent seen in May.
The inflation numbers are key to the BOJ’s monetary policy deliberations, ahead of a meeting next Friday.
In a note, Barclays economist Tetsofumi Yamakawa said much of the market still sees rising prices in Japan as “temporary”, attributing it to “cost push” rather than “demand pull”.
However, he sees a “gradually strengthening possibility” that persistent inflation will materialize with big wage increases as a result of the latest wage negotiations, or so-called “Shinto.”
“We expect ‘shunto’ wage growth to be lower in FY2024 than in FY23, but forecast to rise around 3%, which would be in line with the +2% target for price stability,” Yamakawa wrote.
Given that, investors will be looking for signs that the BOJ will change its stance on its ultra-loose monetary policy — or, more specifically, its “yield curve control” policy.
Under the YCC policy, the central bank has targeted short-term interest rates at -0.1% and 10-year government bond yields at 0.5% above or below zero, with the aim of maintaining the inflation target at 2%.
However, BOJ Governor Kazuo Ueda pointed out. In a recent Reuters report The BOJ’s ultra-loose monetary policy may be on hold for now, saying “there is still some way to go to sustainably and stably achieve the central bank’s 2% inflation target.”
According to Smith, the BOJ is “highly likely” to change its stance on the YCC at the central bank’s next meeting next Friday.
According to Smith, the so-called “core-core” inflation rate — which strips out fresh food and energy costs — was “roaring” at 4.2 percent in June. That’s the most since September 1981, he said, adding that “his own measure shows that what he’s saying is wrong.”
The CLSA strategist said the main drivers of inflation are food, rising electricity prices, rising wages and a weaker yen. Noting that wages also saw their biggest increase in 30 years this year, Smith said there is likely to be a surprise going forward, as rising inflation in Japan pushes up wage prices.
“If the BOJ does nothing, the yen goes to 150 against the dollar,” he said. “We know from experience that interventions don’t work. I’ve seen 95 trillion worth of foreign exchange interventions since 1990, and the impact is hours, not days.”
Smith said the BOJ’s bond purchases are only increasing to maintain YCC policy, noting that its bond purchases since the start of December have accounted for 15.8% of Japan’s gross domestic product.
Ueda has said the BOJ is reaching the limit of what it can do because it already owns about a third of the bond market. “It now owns 55% of the bond market and is starting to look like Looney Tunes.”
However, Yamakawa did not see the BOJ changing its stance on monetary policy at the July monetary policy meeting. Instead, he predicted that the central bank would begin a round of YCC at the October meeting, when the next quarterly outlook report is released.