BoJ Preview: To further adjust policy as early as June even with glass half full

bank of japanBank of Japan

Alicia García Herrero (Natixis) | Recently, the virtuous circle between wages and inflation has begun to strengthen. Following the highest wage hike in the past thirty-three years at the spring wage negotiation, nominal base wage surprised on the upside by rising +2.3% year-on-year in April, the largest increase since July ’94. Furthermore, with inflation expectations remaining above 2%, corporate service prices also picked up by +2.8% year-on-year in April. On the back of these developments, the important question is whether companies will be able to transfer higher costs to consumers.

Realistically, companies are likely to find challenges to transfer higher costs, because real wage growth is expected to remain negative in 2024. In fact, because the negative GDP gap expanded to -1.1% in Q-24, nominal wage growth is unlikely to pick up, as the profitability among SMEs, which generate about 70% of employment, has been stagnating. Furthermore, inflation is anticipated to remain elevated because the government has begun to suspend energy subsides, which erode consumers’ purchasing power.

Nevertheless, the relatively hawkish comments from the BoJ suggest that the Bank could adjust further as early as June, even with the glass half full. The Bank could decide to effectively reduce purchases of JGB to support the weak Yen by eliminating its commitment to purchase the same amount of bond, when the US Treasury yield is falling. Still, the BoJ is likely to keep the option to purchase JGBs at its discretion, to prevent bond yield from surging. 

Furthermore, the BoJ could decide to hike to create room for a rate cut to prepare for rainy days. With the policy rate currently targeted between 0.0-0.1%, the option is limited to a return to non-conventional policy tools whose negative side effects were acknowledged by the BoJ’s extensive policy review. Therefore, the Bank is expected to take advantage of the recent positive news flow to justify its policy adjustment.

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