Selloff or Market Correction? Either Way, Here's What to Do NextSee Overvalued Stocks

BOJ's new policy approach takes shine off its inflation forecasts

Published 04/15/2024, 04:07 AM
Updated 04/15/2024, 07:56 PM
© Reuters. FILE PHOTO: Bank of Japan Governor Kazuo Ueda attends a press conference after a policy meeting at BOJ headquarters, in Tokyo, Japan March 19, 2024. REUTERS/Kim Kyung-Hoon/File Photo

By Leika Kihara

TOKYO (Reuters) -The Bank of Japan is shifting to a more discretionary approach in setting policy, with less emphasis on inflation, sources said, as the central bank maps its monetary path following the historic decision to end a radical stimulus programme in March.

With monetary settings seen on hold, market players are focusing on the BOJ's fresh quarterly growth and price projections due at its April 25-26 policy meeting, for hints on how soon it may hike rates again.

While the central bank is expected to project inflation to stay around its 2% target through early 2027, such forecasts alone won't serve as strong hints of a near-term rate hike, say three sources familiar with its thinking.

"Various data must be scrutinised, not just the inflation outlook," one of the sources said, pointing to the importance of other indicators such as consumption, wages and the broader economy.

BOJ officials, including governor Kazuo Ueda, have said the focus would be on whether wage increases will broaden, and prod firms to hike prices not just for goods but services.

The BOJ ended eight years of negative rates and other remnants of its unorthodox policy last month, making a historic shift away from its focus on reflating growth with decades of massive monetary stimulus.

Many market players expect the BOJ to hike rates again this year with bets split between the chance of action in July, or sometime in the October-December quarter.

In the days after ending negative rates in March, Ueda said the central bank would revert to a "normal" monetary policy that lets various data guide the future rate hike path.

"It's dependent on data," Ueda told a newspaper interview published on April 5, when asked whether the BOJ could raise rates this year. "We'll adjust interest rates according to the distance towards sustainably and stably hitting 2% inflation."

The remarks suggest the BOJ could hike rates regardless of its inflation forecasts, as long as it becomes more convinced than before that Japan will sustainably hit its price goal.

Such a discretionary approach may require market players to scrutinise subtle changes in the way the BOJ describes the economy and inflation, for hints on its policy moves.

Ueda's new approach also heightens the importance of upcoming data, particularly those on wages and consumption.

Consumption has recently been weak on rising living costs and slumping auto sales, raising the risk of an economic contraction in the first quarter.

A rebound in consumption - likely a prerequisites for another rate hike - could happen later this year as wage hikes, summer bonus payments and scheduled government cash payouts around June give households more purchasing power, analysts say.

"Given Ueda's data-dependent stance, the BOJ probably wants to confirm that growth will pick up in the second quarter," said Mari Iwashita, chief market economist at Daiwa Securities.

"If so, it's hard to say enough data would be available at the time of the BOJ's July meeting" to hike rates, she said.

© Reuters. FILE PHOTO: Bank of Japan Governor Kazuo Ueda attends a press conference after a policy meeting at BOJ headquarters, in Tokyo, Japan March 19, 2024. REUTERS/Kim Kyung-Hoon/File Photo

Japan's April-June gross domestic product (GDP) data will be released on Aug. 15, weeks after the BOJ's July 30-31 meeting.

Under current forecasts made in January, the BOJ expects inflation excluding fresh food and fuel to hit 1.9% in both fiscal 2024 and 2025. Reflecting prospects for sustained wage growth, the board may revise up the forecasts, and project inflation to stay around 2% through fiscal 2026, analysts say.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.