MNI POLICY: Economic Concerns Weigh On BOJ's April Exit Plan

Growing concern over Japan’s outlook due to weaker-than-anticipated GDP alongside anxiety over a slower U.S. economy could lead the Bank of Japan to delay a shift away from easy policy expected in April, MNI understands.

BOJ officials will focus on revision to preliminary Q3 GDP data on Dec. 8, which fell 0.5% q/q – the first contraction in three quarters, which has led some to question whether an April exit remains possible, despite persistently strong inflation and growing hope for wage hikes in 2024.

MNI reported last week the BOJ could exit its easy policy settings next April should it receive strong evidence of a virtuous wage-price cycle. (See MNI POLICY: Solid Wage Data Needed Before BOJ April Exit Talk)

The BOJ believes a sustainable economic recovery is a key requirement for the development of a strong wage-price cycle in 2024 and the stable achievement of the 2% price target. A weaker economy will spoil the foundation for wage growth and make it difficult for the BOJ to remove negative rates and yield curve control by April.

BOJ Governor Kazuo Ueda’s view on the economic outlook also remains cautious and he will push against any premature policy shift that could jeopardise achieving the bank’s 2% price target.

PRIVATE CONSUMPTION, CAPEX

Bank officials believe private consumption will continue to recover moderately but that it lacks upward momentum as households shift to more defensive spending habits, such as a stronger move towards more inexpensive products.

Capital investment linked to machinery and construction will remain weak, despite solid plans, due to heightened uncertainty over the global economy. Private consumption, which accounts for about 60% of Japan's GDP, fell 0.04% q/q in Q3, after a revised 0.9% fall in Q2, while capex fell 0.6% q/q following an unrevised 1.0% fall in Q2.

BOJ officials are focused on revised capex plans this fiscal year and corporate price-setting behaviour in the Tankan survey due Dec. 13. They will carefully examine the outlook for domestic demand in the coming months.

The impact of aggressive rate hikes among developed economies could also finally catch up with Japan’s real economy and financial system, officials note. The first-half 2024 U.S. economic outlook will feature heavily in the BOJ's policy decisions as the central bank wants certainty the U.S. will not fall into serious recession before entertaining exit plans.