VIEW: SocGen On The Outlook For MonPol

Societe Generale note that “it goes without saying that Japan's long-term interest rates have been above 0.2% in tandem with the rise in U.S. long-term interest rates, but two other uncertainties are also driving the rise. First, there is the concern that the Bank of Japan will take steps to increase the volatility of long-term interest rates, triggered by the emergence of "adverse JPY depreciation," with core CPI reaching 2% Y/Y even before Governor Kuroda steps down. Second, there is the concern that the BoJ may decide to raise interest rates if either Deputy Governor Amamiya or former Deputy Governor Nakaso, take over as Governor after Kuroda's retirement in April 2023.”

• “However, last week's "limit price operation" showed that the BoJ will not tolerate a rise in interest rates while considering a JPY depreciation. In addition, the view that "adverse JPY depreciation" will eventually be realised is likely to be overstated. Moreover, a sharp depreciation of the JPY in a short period of time and higher prices than currently expected will be needed, in order to lead to strong criticism of the BoJ's non-normalised monetary policy, which would be unlike that of other central banks. However, not only is the link between the U.S.-Japan interest rate differential and the USD/JPY rate now declining, but we also believe that Japanese core CPI will not reach 2% Y/Y in April or beyond. Finally, Amamiya and Nakaso are seen as more hawkish than Kuroda, but given that the annual change of core CPI is likely to drop sharply next year, it will take time for the new Governor to raise interest rates, even if he is able to make minor adjustments to current monetary policy. We expect that the BoJ will maintain the current monetary policy until next April and will not raise interest rates immediately thereafter.”