MNI BOJ WATCH: Policy On Hold, Wage-Hike Data Incoming

The Bank of Japan board will likely maintain its easy policy settings at the Dec 18-19 meeting, as inflation slows in line with October’s forecast and the board awaits further clarity on the strength of wage hikes in 2024, MNI understands.

Some board members remain confident on wage hikes next year, but the majority want to see strong data before removing negative interest rates and adjusting yield curve control. BOJ officials do not want to remove negative interest rates before achievement of the 2% price stability target, while the bank will not end YCC until it is confident it can meet that goal, MNI understands.

MNI reported in November the BOJ could adjust its policy settings at the April 2024 meeting should it receive strong wages and GDP data. (See MNI POLICY: Economic Concerns Weigh On BOJ's April Exit Plan) BOJ Deputy Governor Ryozo Himino earlier in the month noted the bank would carefully consider the timing of any exit and monitor the evolution of wages and prices.

FORWARD SIGNALS

Focus will shift to whether the bank modifies its forward guidance to factor in near-future policy change to avoid market confusion, such as surges in long-term interest rates, and whether its language on accommodative monetary policy continues. The BOJ may indicate its expected timeline to remove negative interest rates by noting the potential for a virtuous wage-price cycle and making it a condition of policy exit.

The market will also watch whether the BOJ deems the “will not hesitate to take additional easing measures, if necessary” wording too obvious and removes it, which could add weight to the policy-change signal.

Despite the hold, bank officials will increase their vigilance against softer private demand following recent weak data and will update their forecasts ahead of January's Outlook Report.

TANKAN RESULTS

Bank officials are increasingly focused on private consumption and capital investment data and their outlook. December's Tankan survey showed consumption had failed to gain upward momentum, while capex implementation had weakened compared to plans. With external demand down, the BOJ wants strong domestic trade to enable businesses to raise wages next year and strengthen the virtuous cycle.

The survey reported three- and five-year inflation expectations unchanged at 2.2% and 2.1% from September’s results and strong corporate output prices. On average, companies saw annual CPI at 2.4% in December, slowing from 2.5% in Q3. The data encouraged BOJ officials and supported the view that Japan’s disinflationary norm is changing, but showed expectations may be anchored around 2%.

While the weak implementation of capex compared to strong plans has puzzled bank officials, they attributed the mismatch to high costs, labour shortages and business taking a “wait-and-see” approach.

Bank officials are also focused on widened retail price cuts and sales at supermarket stores as households increase savings following persistent negative real wages. They believe the worst-case scenario involves a fall in private consumption, which will prevent businesses from raising prices and impede wage growth next year.