MNI POLICY: Weaker Econ Data Risk May Push March BOJ Action

The Bank of Japan could exit negative rates and end yield curve control at the March 18-19 meeting to avoid potentially weaker economic data due out in April that may threaten its ability to adjust easy policy settings, MNI understands.

BOJ officials believe a wait-and-see attitude could risk economic data deteriorating, and lessen the chance of an exit at the April 25-26 board session.

The Bank will publish the March Tankan survey results on April 1 and will hold its quarterly branch managers’ meeting mid-April, which will detail wage hikes at smaller firms and evolving business plans, both crucial for policy change.

BOJ officials are increasingly examining how wage hikes at smaller firms have evolved through their branches, though they remain confident wages will rise. MNI reported in February the BOJ could consider a March adjustmenton strong wages data. (See MNI POLICY: BOJ May Consider March Policy Change On Strong Data)

Japan's core consumer inflation slowed for a third straight month in January at 2.0% from December's 2.3%, but beat forecasts and remained above the central bank's target for the 22nd consecutive month.

However, should the BOJ stand pat in March, the yen could weaken further increasing import prices and dampening private consumption. (See MNI POLICY: Weak Yen Fuels Wage, Prices; Authorities Vigilant) A March hold could also increase speculative trading targeting April policy action and increase financial-market volatility.

The yen-dated overnight index swaps market has priced in a 52% chance of a March move, and 79% probability the Bank will act in April.

WEAK DATA CONCERNS

Recent weak production and private consumption data will prompt the BOJ to tweak its current economic assessment, which states "Japan's economy has recovered moderately," which may be counterintuitive to policy change. However, the BOJ at the March meeting will emphasise the economy remains on track and will gain momentum in or after April.

MNI reported last month recent BOJ communications and results from spring wage negotiations have increased the chance of policy adjustment at the upcoming March meeting.