BoJ Review: Reduced Urgency Provides Time for Tariff Assessment

Summary

• Governor Ueda struck a balanced tone at the BoJ press conference, highlighting both growth risks from tariffs and inflation risks from food prices and wages.
• The BoJ sees a low risk of falling behind the curve on inflation, with the next rate hike likely in June/July, while emphasising short/medium-term rates remain ‘deeply negative’.
• Wage growth remains on track and sustained food inflation is concerning, but tariff risks will delay hikes.

Market Implications

• We are neutral JPY but positioned for near-term cheapening versus GBP.
• We like fading JGB weakness potentially via curve flatteners or on an RV basis against Treasuries.

No Urgency to Hike Soon, Short-Term Real Rates Remain Accommodative

Ueda struck the right balance in today’s press conference. He highlighted both the downside risks to growth from tariffs and the upside risks to inflation stemming from higher food prices and wage growth.

Here are our five takeaways:

Low risk of falling behind the curve. Ueda conveys the hiking timeframe via his measure of urgency. Today, he twice highlighted a low risk of falling behind the curve. This aligns with our view of a potential hike in June/July.

Short- and medium-term interest rates are key. The long end has underperformed over the past two months, raising concerns about debt sustainability. More recently, 10-year real yields have climbed from negative territory to 0. Yet Ueda and Uchida stress the increase has been both orderly and expected given the compression of term premia during large-scale monetary easing. Today, Ueda emphasised the greater importance of short and medium-term interest rates in Japan, which remain ‘deeply negative’. This is due to the short maturity of most corporate loans, which tend to be around three years.

Tariff risk is real, but price impact is uncertain. The BoJ added a sentence in their statement on heightened and evolving trade risks. Ueda refrained from strong judgment given limited clarity and details but suggested an early indication was possible at the April BoJ meeting. He added that the first impact will be on household and business confidence, which requires study, but not for so long that the bank falls behind on normalisation.

Prolonged high food inflation cannot be ignored. Despite elevated food inflation, particularly rice, limited passthrough to services has reassured Ueda. However, he said while transitory increases in food inflation can be ignored, sustained increases cannot, particularly if they impact medium- and long-term inflation expectations. The government recently argued the BoJ should pay closer attention to food prices given the sustained impact on inflation over the past 10 years and the damage to household disposable incomes. Last week, the government began auctioning its strategic stockpiles of rice to quell recent increases, which should help in the coming months.

Wage cycle remains on track. Workers at large firms secured slightly larger wage hikes than expected at 5.46% from this year’s Shunto. Meanwhile, SMEs saw an average rise of 5.09%, up 0.67% from last year. Ueda said these numbers were ‘on track’, which matches our expectations. However, wages alone are no longer enough to warrant further rate hikes, particularly with other risks on the horizon.

USD/JPY rallied +0.5% in the aftermath – which will please Ueda – while the curve marginally bear steepened. We like fading JGB weakness potentially via curve flatteners or on an RV basis against Treasuries.

Viresh Kanabar is an investment strategist with 8+ years of experience, notably contributing to portfolio construction and risk management at CCLA Investment Management, a £12 billion fund. Viresh was also a voting member of the Investment Committee and ran the private asset valuation process.

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