The BoJ Could Step In After Firmer Than Expected CPI Data

Participants return after the elongated Tokyo weekend and will have to weigh up the impulse from the latest round of bear flattening on the U.S. Tsy curve and firmer than expected domestic CPI data (0.1ppt beats across the board).

• CPI data for August saw the headline reading start with a 3 for the first time since Q314, while the ex-fresh food measure moved to the highest level observed since Oct ’14.
• The BoJ continues to expect inflationary pressures to moderate during ’23 and has stressed that it will not act on the current inflationary impulse, given the cost-push nature of the price pressures, as it looks to generate the conditions needed for sustainable wage growth.
• Participants are looking ahead to the latest BoJ decision, which will be delivered on Thursday.
• Note that expectations are for the BoJ to leave its major monetary policy settings unchanged at the end of this week’s decision, at a time when it is seeing the upper boundary of its permitted YCC settings tested.
• There is potential for an unscheduled round of BoJ bond purchases with 10-Year yields testing the upper end of the BoJ’s tolerance band and a bearish impulse expected at the start of the Tokyo session.