Bank of Japan Preview: Forecasts from eight major banks, BoJ to maintain the status quo and remain dovish

The BoJ is expected to maintain its YCC policy and negative short-term rate policy at its January meeting. Inflation will likely slow further in January and the cautionary mood following the recent earthquake will prevail.

We expect the BoJ to remain dovish given (1) the recent easing of CPI inflation, (2) the US Fed’s likely dovish policy direction, (3) a stable Japanese Yen (JPY), (4) modest domestic growth, and (5) the economic impact of the earthquake in early January. We do not foresee a deviation from its existing framework at the January meeting. YCC currently shows enough flexibility to accommodate market fluctuations with minimal effects. We think the BoJ will only consider normalising policy when the growth trend is more robust and inflation is driven by wage growth and demand-pull factors. A normalisation of negative rates and YCC adjustments will also likely be contingent on tangible signs of wage growth, with a potential timeline of April 2024 following the spring wage negotiations.

We expect the central bank to stick with its current policy stance but further out see the BoJ abandoning its negative interest rate policy in April.

We expect an unchanged rate decision. Wage growth remains the missing piece of the puzzle before the BoJ can look towards rate hikes and letting go of the yield curve, but we will likely have to wait for the spring wage negotiations for hard evidence.

We expect the BoJ to maintain its policy rate settings. We still expect a very gradual rate hike cycle to start in mid-2024 when the BoJ will have more insights into wage and inflation developments.

Recent events (e.g., earthquakes/political scandals) put BoJ in a difficult spot to advocate any significant shift in policy. We get fresh forecasts and expect BoJ to revise lower their core CPI forecast to 2.5% for FY2024 vs 2.8% prior and maintain FY2025 at 1.8%. Attention will be on FY2025 f/c if the BoJ plans to signal any imminent exit, it would probably upgrade it to >2%.

We expect that the BoJ will maintain its current monetary policies in January. We expect the core CPI forecasts (excluding only fresh food) for FY24 to decrease from +2.8% in October to +2.5%. However, the FY25 core CPI forecast and the more underlying core core CPI (CPI excluding fresh food and energy) forecasts are likely to remain largely unchanged from October. Looking forward, we continue to believe that the BoJ is unlikely to become fully confident about the sustainable and stable realisation of its 2% price target by April of this year. It is also unlikely to abolish the YCC and negative rates by the same period of time.

We expect the BoJ to hold its policy rate steady at -0.10% and to make no further changes to its Yield Curve Control policy. To the extent the BoJ highlights the importance of the spring wage negotiations and offers positive comments on wage prospects for 2024, as well as maintains or increases its medium-term core inflation forecasts, we think the possibility of an April interest rate increase remains on the table.