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MNI INSIGHT: BOJ To Look Past Yen, Keep Guidance

(MNI) Tokyo

The Bank of Japan is set to look past the weakening yen and leave its forward guidance unchanged at the April 27-28 policy-setting meeting, maintaining the possibility of lower rates if risks to growth rise and inflation fails to sustainably reach target, MNI understands.

There seems little chance policymakers will adjust rates guidance in response to the rapid depreciation of the yen, which fell to multi-year lows of Y129.40 on Wednesday. Officials’ concerns that a weaker currency could impact service sector capex investment are being outweighed by growing downside risks from worsening terms of trade, which are eroding purchasing power despite gains in wages. (MNI INSIGHT: BOJ Worries Weak Yen to Hit 2022 Services Capex).

The BOJ is likely to repeat that it “expects short- and long-term policy interest rates to remain at their present or lower levels,” a phrase introduced in October 2019 as U.S.-China trade friction escalated.

BOJ Governor Haruhiko Kuroda has long maintained that a weakening yen is an overall net positive for the Japanese economy, but recently warned that the pace of its depreciation may be excessive. However, officials are reluctant to consider adjusting the 0.25% upper limit of the BOJ’s yield target for 10-year bonds, their most effective policy tool for targeting currency weakness, in case it saps the economic recovery.

WAGES BOOST

Relatively strong wages data last week will have done little to ease the BOJ’s doubts that inflation is heading towards its 2% target in a sustainable way.

Wages rose 2.19% y/y in fiscal 2022 as of mid-April, up from +2.05% in the same month in 2021, the strongest performance in recent years, a Japanese Trade Union Confederation survey showed. Wages at smaller firms, mainly non-manufacturers, rose 2.31% y/y, higher than the 2.05% to mid-April 2021.

But Bank officials, who are waiting to see the extent to which wage increases filter through to government data in or after June, still expect real earnings to drop this year under the impact of higher prices for imported goods and fuel, reducing the chances of a wage-price spiral.

While households’ short-term inflation expectations are rising, medium- to long-term inflation expectations are stagnant, officials note. Consumer spending is gradually recovering as an estimated JPY40 trillion in savings accumulated during Covid restrictions begins to be spent, but the increase will be muted by concerns over higher prices and future social security payments, officials judge.

Dollar-yen since 2001

Source: Bloomberg

MNI Tokyo Bureau | +81 90-2175-0040 | hiroshi.inoue@marketnews.com
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MNI Tokyo Bureau | +81 90-2175-0040 | hiroshi.inoue@marketnews.com
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