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Summary
- The BoJ hiked 15bp while highlighting increased upside risks to its inflation forecast.
- They were willing to look through weak household consumption, prioritising broadening wage gains and the risks of a weaker JPY.
- Governor Ueda stated monetary policy remains accommodative despite the hike and that further hikes are likely.
Market Implications
- We think the BoJ hikes again in December.
- We remain short 10-year JGBs.
BoJ Hikes 15bp, JGB Purchases to Slow by JPY 0.4tn/Quarter
The BoJ hiked 15bp yesterday to 0.25%, against our expectation of a hold (though a hike was in line with market pricing).
The BoJ also initially slowed JGB purchases to JPY 5.7tn per month. This amount will decrease by JPY 0.4tn each quarter until it stabilises at JPY 3tn per month by Q1 2026. We expected a more significant initial reduction to JPY 5tn, with subsequent decreases of JPY 0.3tn each quarter.
Although the BoJ adjusted its forecasts, these revisions do not signify a fundamental change in their economic outlook. For instance, the FY 24 GDP growth forecast was lowered to 0.6%, reflecting an upward revision to the FY 23 baseline. The BoJ also amended its forecast for core inflation in FY 24 and 25 to reflect the extension in gasoline subsidies and the reintroduction of the utility bill subsidy in August.
On its outlook, the BoJ now acknowledges upside risks to inflation for both FY 2024 and 2025. Additionally, it noted a weaker JPY is more likely to impact consumer prices than in previous years, suggesting increased passthrough risks from currency weakness to domestic inflation.
Hawkish Ueda Says More to Come
Governor Ueda’s press conference and Q&A contained the more important details:
1. Monetary policy remains loose, expect more hikes ahead.
Ueda indicated an additional hike is likely as long as inflation trends remain consistent with their forecast. Ueda also highlighted that, despite yesterday’s hike, monetary remains far below its estimate of the neutral rate. That is, monetary policy is becoming less accommodative not tight! We believe the neutral rate is far nearer 1% this cycle.
2. The BoJ is willing to look through consumer weakness and instead trust survey data and its forecasts.
Some reporters challenged the BoJ’s assertion that the economy was progressing as anticipated, citing persistently weak household consumption. In response, Ueda pointed to encouraging soft data, such as Tankan surveys, and expressed confidence in the bank’s forecast of an upcoming economic rebound. This tells us the BoJ that for now, weak consumption was less important than other data points.
3. A weak JPY influenced the BoJ’s decision to hike.
More important than consumption was the impact of a weaker JPY. This was a larger factor than we had anticipated – apparently the key data point that got the BoJ over the line in July.
Ueda raised two main points. First, a weaker JPY is contributing to rising import prices again. Second, given the economy’s changing mindset, where price hikes can be passed through to the consumer, the risk of rising import prices lifting domestic inflation was higher. He did, however, say the FX rate was not the ‘most important’ driver behind their decision to hike. Instead, we think this was the resolution of the spring wage negotiations (Shunto) where workers at small- and medium-sized businesses also saw their wages rise over 3%. For the BoJ, stronger wage hikes should support consumption.
4. The bar for further hikes is higher.
Ueda said the BoJ must assess the impact of previous hikes (March, July) before raising rates again. We think the bar for another hike is higher, albeit marginally. We believe the BoJ will hike once again in December, with the inflation data again taking priority. However, more signs of an improvement in household consumption will be required from here.
Said differently: inflation outturns as expected + rising consumption = December hike (or sooner). However, if consumption does not recover, the next hike will likely occur in 2025 (before the end of FY 24).
5. BoJ tapers less than expected, but the bearish 10Y JGB case remains intact.
Lastly, the pace of JGB purchases will remain above JPY 5tn until yearend. This means at least for the first 4-5 months, BoJ purchases will be higher than we (and the market) expected. Accordingly, 10-year JGB yields fell 2bps despite the 2-year yield rising by almost 8bps.
Given Ueda’s hawkishness, the market reaction is logical. However, we keep our bearish view. First, JGB purchases will decelerate towards our base case by next March (i.e., the setback is temporary). Second, as economic data strengthens over the coming months and underlying inflation rises, Japanese duration should continue to sell off. The bigger risk to the trade is that for now, global yields are falling, led by the US curve. This could push Japanese yields lower as well due to rate beta.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)