Japan: BoJ hike in sight – But no reason to rush

• The inflation target has been met for 22 consecutive months. Price pressures consistently rhymes with 2% annual inflation but the sustainability of that depends on wage increases.

• We think the BoJ is almost ready to hike the interest rate to zero and dismantle yield curve control. However, we see no reason to rush and expect them to stay on hold at the March meeting ending Tuesday, but it is admittedly a close call

• Whether the BoJ potentially exits NIRP in March or April does not alter our strategic bullish view on the JPY in 2024.

The Bank of Japan (BoJ) has met its 2% inflation target for 22 consecutive months. Their favourite inflation measure, CPI excl. fresh food, has declined steadily and stands at 2% now, as non-fresh food inflation has abated. Core price pressures rhyme with 2% inflation and have done so for a while. Businesses’ inflation expectations have largely stabilised just above 2%. Households are more uncertain about the outlook for prices, though.

With this background, it could seem puzzling why Japan remains the only country in the world with a negative interest rates policy (NIRP). The reason is the absence of any significant wage-price spiral so far, which questions the longevity of Japanese inflation.

The first tally from this year’s “spring wage offensive” showed that workers at major firms got a 5.28% pay increase, fairly close to the 5.85% they asked for. This is the key reason why we expect BoJ will be ready to hike its policy rate to zero in April. That said, it must remain a concern to the BoJ that wage growth is very weak among smaller businesses. Over the recent two years, wages have increased a modest 2.7% overall but only 0.7% in businesses with 5-29 employees. We will have to wait for at least the third wage tally, released in early April, to know much more about the 70% of Japanese workers who are employed in the SME segment. Only by early July, we will get the final tally and thus the full picture of the spill over to small businesses as well.

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