• During our Asian round trip we visited Tokyo talking to policymakers and local analysts. Everyone told us that it was only due to political pressure that the BoJ left interest rates on holds at the January meeting.
  • In our view, the policy board of the BoJ seems to be split into (at least) two groups. One group believes that the BoJ should normalise monetary policy. This group believes that the BoJ should take the opportunity now, when the economy is undergoing a long-term economic expansion, to raise interest rates. The second group is much more concerned about the downside risk. Hence, they believe that the BoJ should be very data-dependent and that the bank should be very cautious in raising interest rates.
  • Many local analysts still maintain that if Q4 GDP data, due on 15 February, come out on the strong side, the BoJ will hike interest rates. And the market currently sees a 75% chance that the bank will hike at the February meeting. We disagree, though. In our view, the weak private consumption and inflation indicators since the January meeting point to the BoJ leaving interest rates on hold at the meeting in February.
  • Going forward, the likelihood that the BoJ will raise interest rates ultimately hinges on whether private consumption and inflation will begin to trend upwards. We note that the Japanese labour market may not yet be tight enough to create significant wage pressures stimulating consumption. Contrary to market expectations we see a significant risk that the BoJ will be forced to remain on hold for another couple of months, as it will have to wait for an uptrend in private consumption and inflation to develop.
  • Our dovish view on the BoJ is in line with our bearish view on the yen (see FX Crossroads: Yen to fall, dollar to rise, 31 January). Moreover, we are convinced that a sudden unwinding of carry trades due to a forceful strengthening of the yen will not be triggered by a more hawkish BoJ.