Market Research Record – Japan’s central bank, the Bank of Japan (BOJ), finds itself in a predicament as the country’s core inflation continues to exceed its 2% target for the 15th consecutive month. Analysts are divided on the BOJ’s approach to inflation, with some suggesting the bank has been caught off guard. Amidst these developments, speculation surrounds a potential shift in the BOJ’s ultra-loose monetary policy, specifically its “yield curve control” (YCC) policy. This article analyzes the differing viewpoints of experts and delves into the factors driving Japan’s inflation surge.
The Inflation Conundrum: CLSA Japan strategist, Nicholas Smith, believes the BOJ has miscalculated inflation, citing that it persisted in forecasting 1.8% inflation for the fiscal year despite witnessing inflation surpassing 2% consistently. He draws attention to the steep rise in the “core-core” inflation rate, excluding food and energy costs, which soared to 4.2% in June, the highest level since September 1981. Smith attributes this surge to various factors, including rising food prices, electricity cost hikes, wage increments, and a weakening yen. He further contends that if the BOJ maintains its current stance, the yen could dramatically appreciate against the dollar.
Differing Perspectives: Barclays economist, Tetsufumi Yamakawa, opines that much of the market perceives Japan’s inflation as “transitory,” influenced primarily by cost-push factors rather than demand-pull. However, he acknowledges the potential for sustained inflation due to anticipated wage hikes resulting from “shunto” negotiations. Yamakawa predicts a modest wage increase of around 3% in fiscal year 2024, consistent with the 2% price stability target.
BOJ’s Monetary Policy Outlook: Investors eagerly await signals from the BOJ regarding a possible shift in its ultra-loose monetary policy, particularly the YCC policy. Currently, the BOJ targets short-term interest rates at -0.1% and aims to keep the 10-year government bond yield at 0.5% above or below zero, all in pursuit of the 2% inflation target. BOJ Governor Kazuo Ueda indicates that the ultra-loose policy might continue for some time, as achieving the 2% inflation target remains a challenge.
Potential Policy Changes: Smith suggests there is a high probability that the BOJ will reconsider its stance on YCC during its upcoming meeting. However, Yamakawa disagrees, foreseeing a potential phase-out of the YCC policy at the October monetary policy meeting.
The Path Forward: As Japan’s inflation trajectory remains uncertain, the BOJ faces tough decisions to strike a balance between monetary policy adjustments and achieving its inflation target. The divergence of expert opinions adds to the complexity of the situation, leaving investors and stakeholders eagerly awaiting the outcome of the BOJ’s upcoming meetings.
