BoJ to leave policy unchanged

Chris Scicluna; Emily Nicol

Monetary Policy
BoJ to leave policy unchanged, but Ueda likely to flag readiness to tighten sooner rather than later if cost-push impact of yen on inflation outlook becomes too big to ignore
Having brought to an end both the negative rate and YCC last month, the BoJ is highly unlikely to change policy again when its Board meeting concludes on Friday. But the press conference will be watched for updated guidance from Governor Ueda about the path ahead for policy in terms of both JGB purchases and rates. A report last week suggested that BoJ officials were mulling a possible cut in the pace of monthly JGB purchases as soon as the July meeting, while another rate hike is fully priced by the market by October. And with the yen uncomfortably weak for Japan’s authorities, oscillating close to ¥154.6/$ and vulnerable to further depreciation pressures particularly if the US dataflow remains firm, Ueda will likely repeat that the BoJ is prepared to tighten policy sooner rather than later if the cost-push impact of the exchange rate on the outlook for inflation becomes too big for it to ignore.

Beyond the policy outlook, the other focus of this week’s BoJ announcements will be its updated economic projections. The median Policy Board forecast for GDP will be revised down due to the impact of production stoppages at Daihatsu Motor last quarter as well as recent weakness in consumption related not least to persistent declines in real wages. Our colleagues in Tokyo expect downwards revisions of about ½ppt in the growth projections for FY23 and FY24, from 1.8% and 1.2% respectively in the previous Outlook Report, but with still above-potential annual growth of about 1.0% considered likely thereafter. However, given the strength of wage settlements in the spring pay offensive reported by the trade unions (5.20% according to Rengo’s latest estimate) as well as higher oil prices, the projection for core inflation (ex fresh food) is likely to be revised up from 2.4% previously, and the projection for ‘core core’ inflation (ex fresh food and energy) will likely be close to 2.0% over the forecast horizon suggesting an increased expectation at the BoJ that its target will be achieved on a sustained basis. The BoJ will probably again consider risks to its inflation projection as ‘generally balanced’.


Data highlights in the week ahead

Today will bring the first of this week’s April sentiment surveys, including the European Commission’s preliminary consumer confidence survey. Having risen to a more than two-year high in March (-14.9), the headline sentiment index is expected to improve slightly further at the start of Q2, albeit remaining well below the levels ahead of Russia’s invasion of Ukraine.

In the UK, the CBI’s industrial trends survey will provide insight into manufacturing conditions in April, with the additional quarterly indices to offer an update on firms’ investment and employment intentions

Attention on Tuesday will be the April flash PMIs from the major economies. In particular in the euro area, having stabilised at the end of Q1, rising to a ten-month high in March (50.3), the composite PMI is forecast to rise for a fifth month out of the past six in April to 50.8. The recovery will continue to have been led by the services sector, while the manufacturing survey will likely point to ongoing modest contraction. And while the German and French composite indices are likely to have risen in April they likely remained below the key-50 ‘stagnation’ level.

In the UK, despite moderating slightly in February and March, the composite PMI in Q1 (53.7) signalled a return to positive GDP growth at the start of 2024, following the recession in the second half of last year. Overall, the composite PMI is expected to move broadly sideways in April, suggesting ongoing recovery momentum at the start of Q2, led by the services sector.

In the US, new home sales are expected to have risen for a third month out of four in March, consistent with a recent pickup in mortgage applications and new buyer enquiries. While this would leave the level of sales (670k) well below the post-lockdown surge in late-2020 and H121, they would be broadly in line with pre-pandemic norms.

The German ifo and Italian ISTAT business surveys will provide additional insight into recovery momentum at the start of Q2, including an update on conditions in the retail and construction sectors (not included in the PMIs). In particular, the headline ifo business climate index is forecast to have risen to an eleven-month high, reinforcing expectations that the bottom in Germany’s downturn has been reached.

In the US, advance release of March durable goods orders data are expected to report a second successive increase – with Daiwa America’s Lawrence Werther forecast growth of 3.0%M/M – dominated by a jump in bookings at Boeing. Excluding transportation, orders are expected to have moved broadly sideways, suggesting a subdued outlook for capital expenditure.

Most attention on Thursday will be on the first estimate of US GDP in Q1, which is expected to show that the economy held up well at the start of the year despite the restrictiveness of monetary policy. In particular, Lawrence forecasts annualised growth to slow to 2.2%Q/Q – a touch below the Bloomberg survey consensus 2.5%Q/Q ann. – from the second half of last year (averaging 4.1%Q/Q ann.), but nevertheless still above potential. Moreover, growth appears to have been constrained by net trade, which is expected to have provide a drag of up to 1ppt. In contrast, final domestic demand is forecast to remain close to the pace of growth in Q4 (3.2%Q/Q ann.), supported by resilient consumer spending. Meanwhile, the core PCE deflator is expected to have accelerated 1.4ppts to 3.4%Q/Q ann. which would be the firmest for three quarters.

Sentiment surveys will continue to dominate the European dataflow, with the German GfK consumer confidence indicator to provide a more detailed assessment at the start of Q4, with households purchase intentions likely to remain subdued despite improving income expectations. In the UK, the CBI’s distributive trades survey will give insight into current retail trends, although given the early timing of Easter this year, this might well suggest a slowdown in annual sales growth at the start of Q2.

It will a busy end to the week for top-tier releases, kicking off with the Tokyo CPI figures for April. Having edged up to a four-month high in March (2.6%Y/Y), headline inflation is expected to have slipped 0.1ppt in April to 2.5%Y/Y. Core CPI (excluding fresh foods) is forecast to have fallen 0.2ppt to 2.2%Y/Y, while the BoJ’s preferred core CPI rate (excluding fresh foods and energy) is expected to have similarly eased 0.2ppt to 2.7%Y/Y, which would mark the lowest for sixteen months and some 1.3ppts below last July’s peak, but nevertheless still comfortably above the 2% target.

The ECB’s bank lending figures, which are likely to suggest that loans to businesses and for house purchase remained relatively subdued in March as elevated borrowing costs continue to weigh on demand. Meanwhile, the ECB’s consumer expectations survey will be watched for a further moderation in inflation expectations. In the previous survey, household expectations for inflation in twelve months’ time dropped to a two year-low. But what matters more for the ECB’s monetary policy decision is expectations over the medium term, and the respective median forecast for three years ahead merely moved sideways for a third consecutive month at an above-target 2.5%Y/Y.

In the US, the monthly personal income and spending figures for March are likely to tally with solid wage growth in the labour market report, while spending will be boosted by the solid demand in retail sales that month. But likely of most interest will be whether the strength in core CPI (0.4%M/M) will be repeated in the core PCE deflators, which are also informed by PPI. Daiwa America forecasts a monthly rise of 0.3%M/M.

Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at