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Summary
- Recent data has been mixed, preventing the BoJ taking a more hawkish tone than January.
- Food prices and wage growth have been higher than expected but may be negated by rising tariff tensions and weak consumption.
- We expect Ueda to strike a cautious tone as he waits for more clarity on trade tensions and the wage front.
Market Implications
- We expect the BoJ to stay on hold until at least July.
- While the Japanese front-end is fairly priced, we think the sell-off in long-end JGBs has been excessive presenting opportunities to be long on an RV basis.
BoJ Preview: On Hold, Striking a Cautious Tone
We expect the BoJ to maintain its current policy stance at tomorrow’s meeting. In addition, mixed economic signals provide little impetus for a more hawkish or dovish shift. We think the sell-off in long-end JGBs has been excessive presenting opportunities to be long on an RV basis.
Hawkish Factors:
- Shunto wage negotiations were strong, including for small and medium-sized businesses.
- Headline inflation continues to rise, led by higher food prices – particularly rice.
Dovish Factors:
- Consumption data has been weak, declining by 6.8% annualised over the past three months, driven primarily by reduced spending on goods.
- It is now clear the US will implement tariffs against Japanese automobiles and other exports after negotiations failed to prevent new trade barriers.
Ueda to Strike a Cautious Tone
The BoJ faces a challenging environment. Inflation remains elevated, driven by supply-side factors, while the economic growth outlook has deteriorated, potentially impacting hiring and corporate investment decisions.
We expect Governor Ueda to strike a cautious tone during the press conference. He will likely emphasize domestic conditions remain fundamentally robust, with strong wage growth potentially allowing the BoJ to look through temporary weakness in household spending. However, the language regarding consumption may be downgraded from being on a ‘moderately increasing trend.’
Ueda is unlikely to provide a significant impact assessment of US tariffs. Instead, he could highlight the need for clarity and further analysis of potential consequences. We do not anticipate further details on the BoJ’s view of the neutral rate at this meeting.
Central Bank Speech Outlines Bumpy Path
Two key speeches since the January BoJ demonstrate the uncertainty ahead.
First, arch-hawk Governor Tamura set the speed limit for the market.
Then, Deputy Governor Uchida reiterated Tamura’s view of acute labour shortages in certain industries, which further compound wage pressures. Uchida also acknowledged the difficulty smaller businesses face in passing higher costs to consumers. Finally, Uchida also said the BoJ does not provide a fixed path for rate hikes.
Therefore, while the path towards neutral remains intact, it may be bumpy. This could mean slower hikes because of tariffs or faster hikes due to persistent supply-side inflation or faster wage growth.
Market Implications
Rising JGB yields have attracted significant market attention. European rate beta may have been responsible for c. 50% of the move. Since February, the 2s10s JGB curve has steepened to almost 70bps, which we consider excessive. A flatter yield curve would be more appropriate for a central bank to maintain a gradual hiking path while facing downside growth risks.
We expect 10 and 30-year JGBs to catch a short-term bid from the GPIF and other domestic pension funds looking to rebalance following the recent rates sell-off. We would play this on an RV basis.
