MNI STATE OF PLAY: BOJ To Hold Despite Higher Prices Outlook

The Bank of Japan is set to leave both monetary policy and guidance unchanged at the upcoming April meet, despite a likely upgrade to its near-term inflation outlook, as it still sees higher prices as unsustainable over the medium term along with downside risks to the economy.

Despite the weaker yen and global bond yields trending higher, MNI reported recently there seems little chance policymakers will abandon either the -0.1% overnight policy rate or the 0% 10-year yield target with its -/+ 25 bps tolerance band – a band that has seen the upside severely tested in recent weeks.

The BOJ is studying the adverse impact of the weaker yen on smaller firms and consumers, although the bank still sees the weaker currency having an overall positive impact.

JAWBONING

Even if policymakers see a concern in the weaker currency, there are few tools in the BOJ’s box to help reverse recent weakness. Raising interest rate is not a measure for an economy facing headwinds and the Ministry of Finance is responsible for direct forex intervention, if it was called for.

Finance Minister Shunichi Suzuki added to speculation of possible forex intervention last week, saying the surging cost of materials can't be passed on through higher prices, or wages and “a weak yen can be considered a bad thing.

The Ukraine-war driven rise in crude oil price from late January, the weaker yen and the fading impact of lower mobile phone charges on CPI from April will push policymakers to raise their inflation view. The BOJ will likely raise its median forecast for inflation in FY22 to above mid-1%, up from the +1.1% seen in January, whilst lowering its growth forecast to 2% from January’s 3.8% estimate.

Japan’s core CPI is expected to hover around 2% for some time after April but bank officials don’t see an increase as sustainable without a solid pick-up in wages.

Despite the higher inflation forecast, the BOJ is expected to Confirm no change in monetary policy, noting the unsustainability of higher prices.

LOWER GROWTH

A worsening of the terms of trade caused by the rise in commodity prices and measures to curb Covid-19 infections are behind the expected downward revision to economic growth.

As for the GDP growth forecast in fiscal 2023, the BOJ board will likely raise the outlook from January’s +1.1%, seeing some of this year’s upside now delayed. Inflation forecasts for 2023 will likely be lower than those for this year.

The BOJ is expected to maintain the view that Japan’s economy has picked up as a trend, although the economy is likely to contract for the first quarter due to weaker private consumption caused by and the spread of Covid-19 and subsequent prevention measures.