BoJ likely to look through widespread price jumps

The Bank of Japan left monetary policy unchanged at today’s meeting, maintaining current short- and long-term interest rates as we anticipated. The BoJ’s new strategy of offering daily, unlimited fixed-rate JGB purchases has been defending the +/-0.25% range for 10yr JGB, with lower purchases than previously.

The BoJ’s quarterly Outlook Report revised up the median CPI forecast to 2.3% from 1.9% for FY2022, but estimates for FY2023 at 1.4% and FY2024 at 1.3% remain short of the BoJ’s 2% target.

What you will learn:

• We share the BoJ’s view that the ongoing price increase is a one-off event driven by a sharp rise in input costs. We don’t forecast sustained inflation without support from demand, which is unlikely amid stagnant wages.
• Despite the modest overall rate, inflation is unprecedentedly widespread – particularly price rises for daily necessities. This, alongside yen weakening, was a major issue at the upper house election on July 10, although the ruling parties secured a comfortable majority.
• We still see no incentive for both the Kishida administration and the BoJ to change the current low interest rate policy through the Yield Curve Control framework. The death of former Prime Minister Shinzo Abe is unlikely to change the overall macroeconomic framework in the near future.