BoJ maintains ultra-accommodative policy stance

Emily Nicol
Chris Scicluna

BoJ leaves policy unchanged, forecasting inflation below target in FY23 and 24 while also flagging downside risks to growth; PM Kishida to announce stimulus details shortly
There were no surprises whatsoever from the BoJ today, with the Policy Board maintaining all its key ultra-accommodative policy settings, including the 10Y yield target of “around 0%” and negative policy rate (-0.1%). And, contrasting sharply with other major central banks, it (rather unconvincingly perhaps) reiterated that it stood ready to easy policy further if necessary. Nevertheless, the BoJ revised up its inflation forecast across the horizon and reported a pickup in inflation expectations too. But inflation is still expected to fall back below target before too long and remain there over the medium term.

The upwards revision to the BoJ’s forecast for core CPI (excluding fresh foods) in FY22 was marked, by 0.6ppt to 2.9%Y/Y, with the BoJ noting that risks to its overall inflation outlook are skewed to the upside. But while the forecasts for FY23 and FY24 were also nudged higher, by 0.2ppt and 0.3ppt apiece, they remained below target at 1.6%, with the fall in inflation principally reflecting base effects from energy and food prices. Indeed, when also excluding energy, the BoJ expects core CPI to ease only very slightly, from 1.8%Y/Y in FY22 to 1.6%Y/Y by FY24.

The BoJ’s dovish stance also reflects its judgement that risks to the growth outlook remain skewed to the downside, not least reflecting weaker external demand amid recession risks in the US and Europe. Indeed, its baseline GDP growth forecast was today revised down by a further 0.4ppt to 2.0% in FY22, by 0.1ppt to 1.9% in FY23. The forecast for FY24, however, was nudged up 0.2ppt to 1.5%. But as highlighted by the BoJ, the outlook remains extremely uncertain.

Against this backdrop of downside risks to growth amid pressures on prices of essential goods, the government today is set to confirm an additional fiscal support package worth ¥29.1trn (a little more than 5% of GDP). Prime Minister Kishida will unveil details at a press conference shortly. But reports suggest that it will include new measures to reduce household electricity bills by around 20% from January for nine months and extend gasoline price subsidies. So, while today’s package will undoubtedly provide support to growth, it will also help reduce the near-term inflation profile.

Certainly, BoJ Governor Kuroda in his press conference reiterated that he does not expect the BoJ to hike rates or exit from its current policy stance anytime soon. However, with the BoJ’s inflation forecast in FY24 having been nudged higher (and just 0.4ppt below target), Kuroda did concede that the BoJ was “getting closer to stably and sustainably achieving 2% inflation”, leaving the door open to a policy adjustment when a new Governor takes over next April.

Tokyo core CPI inflation surges to highest rate since 1989
In terms of today’s Japanese data, the Tokyo CPI inflation release saw the headline rate jump 0.7ppt to 3.5%Y/Y in October, the highest since 1991, with core inflation (ex fresh foods) up 0.6ppt to 3.4%Y/Y, the highest since 1989. Within the detail, a large chunk of the increase came from food inflation, which, excluding fresh items, rose 1.4ppt to 5.9%Y/Y, the highest since February 1981. But while hotel charges fell back reflecting government support, prices for eating out rose at the fastest pace since 1990. And given base effects associated with the government’s previous mobile phone tariff discount adding a further 0.3ppt to the headline CPI rate, services inflation rose 0.3ppt to 0.8%Y/Y, the highest since April 2019. Admittedly, when excluding all food and energy, the internationally comparable core CPI gauge rose just 0.3ppt to 1.1%Y/Y, to remain well below target, but nevertheless the highest since 2015. Given today’s data, our colleagues in Tokyo now expect national core CPI (ex fresh food) to rise 0.7ppt to 3.7%Y/Y in October, before falling back below 3.0%Y/Y from December on.

Inflation in France and NRW state surprises on the upside, but Spanish inflation undershoots expectations
The first flash inflation data from the large euro area member states have been decidedly mixed, with significant surprises on both sides. French inflation surprised significantly on the upside, with the EU-harmonised HICP measure rising 0.9ppt to 7.1%Y/Y (vs the median forecast on the BBG survey of 6.5%Y/Y) and the national CPI measure up 0.6ppt to 6.2%Y/Y, the highest since 1985. Once again, the pressures were relatively broad-based, with components for energy (up 1.3ppts to 19.2%Y/Y due to higher petrol prices), food (up 1.9ppts to 11.8%Y/Y) and non-energy industrial goods (up 0.6ppt to 4.2%Y/Y) all stronger while services inflation was unchanged at 3.2%Y/Y. In contrast, Spanish inflation surprised to the downside, dropping 1.7ppts on the EU-harmonised measure to 7.3%Y/Y (vs the BBG consensus of 8.1%Y/Y) seemingly due to a faster pass-through of the recent decline in natural gas prices to consumers. Finally, based on the early figures from the Länder, German inflation looks to have accelerated in October, contrasting expectations of no change in the EU-harmonised HICP rate from September’s reading of 10.9%Y/Y. In particular, in the largest state of North Rhine-Westphalia, which accounts for more than one fifth of the economy, CPI inflation accelerated 0.9ppt to a new high of 11.0%Y/Y. While inflation in the much smaller state of Rhineland-Palatinate slowed 0.1ppt to 9.7%Y/Y, that will have little impact on the national figure.

Q3 GDP beats expectations in Germany with slight pickup in growth; GDP slows in France and Spain but euro area on track for modest growth
The first estimates of Q3 GDP from the large euro area member states point to a slowdown in the euro area as a whole, but also point to positive growth of around 0.2%Q/Q overall in the region, down from 0.8%Q/Q but also probably the best that might have been hoped. Certainly, the German figures beat expectations, with a pickup in growth 0.2ppt to 0.3%Q/Q, contrasting expectations of a modest drop, and leaving output 0.3% above the pre-pandemic level. While no detail was provided, Destatis reported that private consumption was the main driver of growth.

Elsewhere, in line with expectations, French GDP growth moderated 0.3ppt to 0.2%Q/Q to leave the level of economic output 1.1% above the pre-pandemic level in Q419. Private consumption was flat while net trade subtracted 0.5ppt from growth. So, almost all growth in France in Q3 came from capital spending, with fixed investment up 1.3%Q/Q thanks not least to strong capex in the transport equipment sector, and inventories adding 0.2ppt. Government consumption also chipped in to support growth, rising 0.5%Q/Q. In Spain, meanwhile, GDP slowed 1.3ppts, also to 0.2%Q/Q, to be 2.0% below the pre-pandemic level. Support to Spanish GDP growth came from both household consumption (1.1%Q/Q) and fixed investment (0.6%Q/Q). But, as in France, net trade subtracted as imports (3.7%Q/Q) significantly outpaced exports (1.3%Q/Q). Looking ahead, we expect the German data, due shortly, to show a modest contraction (just -0.1%Q/Q) in GDP.

US focus on Q3 employment costs as well as September personal income and spending
In the US, focus today will be on the monthly personal income and consumption figures for September, as well as the Employment Cost Index for Q3. Our colleagues at Daiwa America note that Data on average hourly earnings and worktimes suggest a moderate increase in wages and salaries in September but overall personal consumption should be buoyed by spending on vehicles and services. Meanwhile, in terms of the deflators, lower energy prices should provide a partial offset to a sharp increase in food prices and constrain the expected increase in the headline PCE price index, but a surge in the core CPI points to another rapid increase of 0.5%M/M in the Fed’s preferred core PCE deflator. And the tight labour market raises the likelihood of a strong increases in the employment cost index of about 1.2%Q/Q in Q3, down only marginally again from 1.4%Q/Q in Q1 and 1.3%Q/Q in Q2.

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