Japan: BoJ inflation focus and rate risks – Rabobank

Rabobank's Senior FX Strategist Jane Foley examines Japanese inflation dynamics and Bank of Japan policy. The report notes elevated Oil prices and supply risks, but stresses BoJ’s focus on core inflation and wage-driven pressures after decades of deflation. It highlights BoJ’s warning that core CPI could exceed 2%, raising prospects of a rate hike around September or October.

Core CPI, wage growth and BoJ outlook

"While a loosening in the labour market reduces the chances of second order price effects, elevated oil prices may still push various G10 central banks into more hawkish policy positions this year. Not only does the continued (near) closure of the Strait of Hormuz imply inflationary risks for the Fed, but it may also raise the prospect of the USD finding fresh safe haven support. This scenario would clearly be far from optimal for the MoF."

"However, the BoJ has been focussed on core inflation and ensuring there has been a sufficient psychology change within firms to move away from cost cutting behaviour in favour of wage hikes. In its latest Outlook for Economic Activity and Prices the BoJ has flagged the risk that core CPI could deviate above the 2% inflation target. This raises the prospect of a September rate hike from the BoJ, but for now the market is focussing on the potential for an October move."

"More signs of resilience in the Japanese economy and an uplift in growth expectations would help reduce fiscal concerns. As it stands, however, the government will likely have to make more effort to respond to the market’s concerns about fiscal discipline in order to reassure investors and calm the JPY."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)