BoJ Disappoints, Watch Inflation Pulse

The BoJ disappointed the hawks. Japan 10Y yields are modestly lower, and both the yen and Nikkei are down 0.5%. This fits into our view of BoJ inaction.  

• In terms of the BoJ stance, it was more dovish than July. I note that the statement contained phrases like: 

• ‘On the price front, the year-on-year rate of increase in the consumer price index (CPI, all items less fresh food) is slower than a while ago’ and ‘[It] is likely to decelerate, with a waning of the effects of the pass-through to consumer prices of cost increases led by the past rise in import prices.’ 
• This contrasts with the July statement which had statements like ‘Japan’s recent inflation rates…are higher than projected in the April 2023 Outlook Report, and wage growth has risen’ and ‘Signs of change have been seen in firms’ wage and price setting behavior, and inflation expectations have shown some upward movements again’. 

• This suggests that the BoJ is not keen to push the narrative that they need to raise rates to curb inflation.  
• As for inflation, we received August CPI. Headline inflation was 3.2% (y/y) vs 3.3% previously, CPI fresh food and energy was 4.3% vs 4.3% previously, and CPI ex food and energy was 2.7% vs 2.7% previously. The stability of the core numbers could be the BoJ’s focus. I also like to look at the inflation pulse (i.e., annualised past three months inflation). It shows a clearer peak in inflation in April 2023, but levels are still elevated (Chart 1). I will watch to see if the pulse picks up again along with wages for a shift in BoJ hawkishness. 
• In terms of market impact, my bias is to bearish JPY and neutral Japan rates. 

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

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