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J.P.Morgan: YCC Approaching Its Final Chapter

BOJ VIEW

J.P.Morgan write “with broadening inflation pressures backed by a gradual change in firms’ cost-passthrough behaviour, inflation continues to rise. We expect the trend rise in inflation to continue, and we now look for BoJ core inflation to exceed 2% in Q123. It likely will then fall below 2% as goods inflation wanes, but will still remain close to 2% through the rest of ‘23.”

  • “We also expect domestic demand to remain strong for the time being, supported by the reopening dynamics. There are already signs of labor market tightening, with difficulties in hiring as services activity normalises.”
  • “If underlying inflation approaches the 2% target, supported by broadening inflation pressures and rising wage growth, the BoJ should have sufficient cover to adjust the YCC, marking the first step toward policy normalisation. We now expect the BoJ to make an adjustment to YCC settings in March 2023, which will also mark Kuroda’s last meeting as governor. This timing is consistent with our expectation that the trend rise in underlying inflation and wage growth is confirmed early next year”
  • “We do not rule out the possibility of a surprise earlier move: BoJ meetings after October will become live.”
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J.P.Morgan write “with broadening inflation pressures backed by a gradual change in firms’ cost-passthrough behaviour, inflation continues to rise. We expect the trend rise in inflation to continue, and we now look for BoJ core inflation to exceed 2% in Q123. It likely will then fall below 2% as goods inflation wanes, but will still remain close to 2% through the rest of ‘23.”

  • “We also expect domestic demand to remain strong for the time being, supported by the reopening dynamics. There are already signs of labor market tightening, with difficulties in hiring as services activity normalises.”
  • “If underlying inflation approaches the 2% target, supported by broadening inflation pressures and rising wage growth, the BoJ should have sufficient cover to adjust the YCC, marking the first step toward policy normalisation. We now expect the BoJ to make an adjustment to YCC settings in March 2023, which will also mark Kuroda’s last meeting as governor. This timing is consistent with our expectation that the trend rise in underlying inflation and wage growth is confirmed early next year”
  • “We do not rule out the possibility of a surprise earlier move: BoJ meetings after October will become live.”