BoJ keeps its powder dry for 2024

Chris Scicluna

BoJ’s monetary policy and forward guidance left unchanged

  • The BoJ left unchanged its monetary policy when its final Policy Board meeting of the year concluded today. So, most importantly, it maintained its -0.1% negative policy rate. And it left unchanged the parameters guiding its flexible Yield Curve Control (YCC) framework, with the stated 10Y JGB yield target still remaining ‘at around zero’ – well below current market yields – and the upper bound for 10Y yields used as a reference in its market operations kept at 1.0%.
  • The BoJ also left intact its forward policy guidance, committing to maintain Quantitative and Qualitative Monetary Easing (QQE) with YCC as long as is necessary for maintaining the inflation target in a stable manner. And, perhaps oddly given the continued debate about whether and when it should raise rates, it reiterated that it will not hesitate to take additional easing measures if necessary.

No significant change to the BoJ’s assessment of economic conditions either

  • The Policy Board’s assessment of economic conditions was little changed from its previous policy meeting two months ago. So, e.g., it continued to judge that the economy ‘has recovered moderately’. But it noted that the pace of recovery in overseas economies ‘has slowed’. It also acknowledged that private consumption has been affected by price rises. And while it revised up its assessment of corporate profits, it revised down slightly its assessment of investment.
  • Most importantly, the Policy Board still thought that ‘underlying CPI inflation is likely to increase gradually toward achieving the price stability target, as the output gap turns positive and as medium- to long-term inflation expectations and wage growth rise.’ But it also continued to emphasise that uncertainties with respect to the outlook remain ‘extremely high’.

Outlook for wages still key for the BoJ, but Fed policy shift complicates the outlook

  • In his press conference, Governor Ueda judged that ‘cost-driven inflation appears to be finally peaking’. But he added that the outlook for demand-driven inflation was probably unchanged. As such, he considered that ‘The chance of trend inflation accelerating towards our price target is gradually heightening.’ However, he cautioned that ‘we still need to scrutinise whether a positive wage-inflation cycle will fall in place.’ So, the outlook for wages remains key for determining the BoJ’s next steps.
  • Of course, since the BoJ’s Policy Board last met, the Fed has signalled that it expects to implement a series of rate cuts in 2024, and markets have priced-in substantive easing at other major central banks too. Ueda today acknowledged that such future shifts in Fed policy could have an impact on the BoJ’s decision-making, stating that ‘If the Fed were to shift to a rate-cut cycle, …[it] would have an impact on Japan's economy such as through currency moves and the chance of a U.S. soft landing.’ But he downplayed the need for the BoJ to accelerate its rate-hike plans simply to avoid clashing with Fed rate cuts.

Will there still be insufficient information to justify a rate hike in January?

  • Ueda appeared today to acknowledge that the BoJ might well again struggle to make a water-tight case for raising rates at its next policy meeting on 22-23 January. For example, while he noted that the BoJ would update its economic projections, he agreed that there will not be a great deal of additional top-tier economic data published between now and then that might justify a sudden policy shift. (Among the key releases, there will be two sets of national CPI inflation data but only one set of labour market figures released ahead of the January monetary policy meeting.)  
  • With respect to the all-important topic of the outlook for wages, Ueda noted that while ‘Labour unions are demanding wage hikes exceeding those of this year. Executives of some big firms are commenting on prospects of higher wages... Our hearings… show many companies have yet to decide next year's wage policy due to high economic uncertainties.’ That would again suggest a need for the BoJ to wait for concrete data on settlements at the forthcoming Spring wage round before pulling the trigger on a rate hike.
  • Of course, Ueda also refused to eliminate the possibility of a hike next month, and insisted that the BoJ would not pre-announce future policy decisions, adding ‘I don't think the chance is high for us to say abruptly that we will hike rates at a subsequent meeting’.

 Further communication to come from the BoJ ahead of the next policy meeting

  • There will, however, be further communication from the BoJ before the next monetary policy meeting in January. The summary of opinions expressed by Policy Board members at today’s meeting will be published on 27 December. Before then, Governor Ueda will make a keynote speech to the Keidanren business organisation on 25 December. And he will also hold a quarterly BoJ branch managers’ meeting, at which he will also give a speech, on 11 January. All of this information will be watched for further clues as to what might happen policy-wise next month and beyond. 

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