BoJ Preview: Forecasts from 11 major banks, little need to rush into making policy changes

Although we can’t rule out a rate hike in December, it seems premature in the backdrop of the poor Q3 GDP numbers that showed the Japanese economy contracted 0.7% QoQ. We also think it is more likely the BoJ would move on rates when it provides an update of its forecasts, which it is not doing in this meeting. Early next year, the BoJ will provide forecast updates at its January and April meetings. We lean slightly in favour of an April move as some of the current trends in key price and wage data should be more established at that time, giving the BoJ confidence that it is getting its desired virtuous wage price cycle that will sustainably yield 2% inflation. We believe other aspects of policy will continue to be open for adjustment, such as more tweaks to YCC or its complete end and removing its forward guidance that rates could go lower. It is also possible the BoJ flags that it will discuss steps to normalise policy in coming meetings.

We expect the BoJ to maintain its key monetary policy. On the other hand, at the press conference, it will still be interesting to see whether the BoJ has become more confident that the 2% price target will be achieved in a sustainable and stable manner. Most of all, we will be looking to see whether Governor Ueda emphasises the side effects of negative rates. Going forward, we continue to believe that it is unlikely that the BoJ will be confident that the 2% price target will be reached in a sustainable and stable way by April next year, and we, therefore, do not expect it to abolish YCC and negative rates by then.

We expect the BoJ to keep the policy rate unchanged, even as concerns around CPI rise. The central bank is likely to focus more on the weak Q3 growth print and improving financial market conditions; Japan’s Q3 GDP dropped more than initial forecasts. The BoJ has been concerned about a weakening JPY given the impact on CPI and the risk of capital outflows; however, the JPY has strengthened amid hawkish messaging from the BoJ. The central bank may tweak Yield Curve Control (YCC) measures to support the JPY. 

There has been some speculation about whether the BoJ would tighten policies. We continue to believe we need more firm conclusions on 2024 wage negotiations before they will feel confident to abandon yield curve control and raise the rate to zero.

We expect the central bank to keep its current monetary policy stance but also see a 60% chance of some hints being made about an end to the negative interest rate policy at the January meeting. 

Recent comments from the BoJ Governor and Dep Governor are nudging the market towards the Bank removing NIRP. Our call is for the BoJ to end NIRP in April, but the odds of a shift as early as Jan are now becoming more likely. A move at this meeting cannot be ruled out given the Bank has a record of surprising in Dec but this is not Ueda's style.

Our base case remains for the central bank's policy rate to remain negative until the April 2024 meeting, when we forecast a 10 bps hike to 0.00%.  Japan needs to see stronger GDP growth, with strength specifically flowing from domestic components such as consumer spending and business investment. Third quarter GDP disappointed in both of those categories. Another important factor, and one that has been repeatedly commented on by BoJ officials, is the outcome of next year’s spring wage negotiations. BoJ officials have highlighted the need to see stronger wage growth that would contribute to an entrenchment of on-target inflation. As we do not see these elements coming together just yet, we continue to call for an April hike, though a Q1-2024 move can not be completely ruled out.

We expect the BoJ to maintain all its major policy settings, though the overall tone about future policy at the press conference and statement could start to soften.

Despite all the noise about this week’s BoJ policy meeting being ’live’, regular watchers of the central bank see little to no chance of a rate hike this month. Not a single contributor to either the Bloomberg or the Reuters surveys is forecasting a change in interest rates. We agree with this assessment. That said, the Reuters survey did highlight that over 80% of forecasters are expecting that the central bank will have exited negative rates by the end of next year, with April being the favoured month for the end of this policy. While talk of a rate hike as soon as this week has been given short shrift by regular BoJ watchers, Governor Ueda’s words are still likely to be carefully assessed as the market looks for clues as to when the central bank might act

The BoJ’s final meeting for 2023 could go in either direction. The central bank is still very dovish and retains its Quantitative and Qualitative Monetary Easing with Yield Curve Control after some tweaks over the past twelve months. Ahead of the December meeting, Governor Ueda and another senior official made some hawkish comments, which were interpreted as hints that the BoJ was going to lift rates out of the negative zone (NIRP). The timing of such a move is a little questionable, as other central banks are pausing and some are thinking rate cuts. And, Japan’s inflation rate is slowing. But if the market is expecting it, why not take the opportunity to finally lift rates back above zero, and save the bullets for the next downturn? Unfortunately, chatter from other BoJ officials, suggesting that there is no rush, is muddying the waters. Given the Bank’s history, it should surprise no one if it opted to stay the course.

We do not expect a BoJ policy change and the BoJ could also be cautious on making changes to the statement that fuels expectations of a hike in January. The BoJ probably wants maximum flexibility. However, any Yen selling from here is unlikely to last long given the bulk of the recent decline in global yields will likely hold as the global inflation declines are real.