Monitoring the BoJ: Focus on Wages

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BoJ Forecasts

Summary of Views

Economic data

• January BoJ forecasts pointed to a slower recovery (albeit still above potential growth rate), but a higher pace of inflation in the near-term (table above).
• Wage growth remains front and centre, more important than contemporary CPI prints right now. On that, nominal wage growth jumped to 25-year highs in December, but these drivers are expected to be temporary. Governor Kuroda (echoed by others such as Noguchi) has previously cited 3% wage growth as the sustained rate needed to achieve the 2% inflation target.
• Such a requirement puts a lot of importance on this year’s ‘Shunto’ (spring Union wage agreements), which we may start to hear from in the near-future. Union membership in the country has been trending down in recent decades, and as such the Shunto is not the be-all and end-all (Chart 1). Even a large number equivalent to >3% annual growth is likely insufficient alone to allow the BoJ to declare ‘job done’. However, data so far suggests strong outturns, which would constitute a step in the right direction.
• Elsewhere in data, suppressed marginal propensity to consume is keeping total consumer spending down (see surveys and data).

New Governor Announcement

• Although PM Kishida’s decision to appoint Ueda Kazuo to lead the BoJ generated initial buzz around the possibility of there being a break from YCC, his subsequent comments (including those to parliament last week) were more in line with the well-established BoJ mantra (continue stimulus until inflation target sustainably achieved; no immediate change to YCC). That has helped soften the tone.
• How much can be read into his comments remains to be seen – he is not in place at the Bank yet, and so it is not that surprising that he is not rocking the boat. His comments once he takes up his position will be more important. Most economists now expect the BoJ to tighten this year following Ueda’s appointment. Market pricing agrees, albeit less is priced in now versus before the last meeting (Chart 1).

See here for our overview of recent BoJ comments

The Curve and YCC

• While, contrary to our expectations the BoJ did not widen its YCC band at the January meeting, stresses on the curve remain strong (see section below). Recent UST weakness is dragging global bond yields higher and JGBs are no exception. So far the rate of BoJ purchases is looking sustainable compared to where they were in January, but another bout of weakness could strain these levels again.
• Our expectation remains for the BoJ to drop the YCC this year. Further adjustments area also possible, including further widening the band, or reducing the target maturity. If more strain is seen in the near-term such changes could occur as soon as the 10 March meeting. Otherwise, Kuroda may want to leave it to Ueda. Until then, our PCA model flags value receiving 10Y JPY swaps on the 5s10s30s fly.

Tracking Stress Within the Curve – Rationale for Another YCC Shift

Recent Voter Comments

Surveys and Economic Data

Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank.

Photo Credit: depositphotos.com

(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.)