During Monetary Policy Meeting (MPM) today, the Policy Board of the Bank of Japan (BoJ) decided, by unanimous vote, to leave rates at the accommodative level current, or around at 0-0.1%. Regarding purchases of Japanese government bonds (JGBs), CPs and corporate bonds, the central bank will conduct the purchases in accordance with decisions made at the March 2024 MPM.
However, the BoJ has decided, with one majority of 8 votes in favorThat will subsequently reduce the amount of bond (JGB) purchases to ensure that long-term interest rates are formed more freely in financial markets. The central bank will gather the views of market participants and, at the next MPM, decide on a detailed plan for reducing the purchase amount over the next one to two years or so.
On the pricing front, the year-on-year increase rate of the consumer price index (CPI, all items except fresh foods) was recently between 2 and 2.5%, as services prices continued to grow moderately, reflecting factors such as wage increases, although the pass-through effects of cost increases driven by past increases in import prices on consumer prices have weakened. Inflation expectations increased moderately.
The Bank of Japan expects the year-on-year rate of increase in the consumer price index (all commodities except fresh foods) to be pushed upward during fiscal 2025 by factors such as the waning of the effects of the government’s economic measures which push inflation downwards. Meanwhile, underlying inflation is expected to rise gradually, as the output gap is expected to improve and medium- and long-term inflation expectations are expected to rise with a virtuous cycle between wages and prices continuing to intensify.
Ueda: the extent of the reduction is significant
“When reducing bond purchases, it is important to leave flexibility to ensure market stability, while doing so in a predictable form. The size of the reduction will probably be significant. But the specific pace, framework and degree will be decided following discussions with market participants.” He stated it Kazuo Uedathe governor of the Bank of Japan, in the post-meeting press conference.
“As we reduce bond purchases, the BOJ bond holdings will decline – said Ueda – But the stock effect of our holdings will continue to have an effect on the economy”.
On supporting monetary policy, he said: “if underlying inflation accelerates in line with our forecasts, the BoJ will consider the adjustment of the degree of monetary support. If the economy and inflation exceed our forecasts, this will also be a reason to raise interest rates.”
As for the weakness of the yensaid: “Exchange rate movements would have a large impact on the economy and on prices. Recently, the effect on prices has probably increased due to changes in the behavior of firms in setting wages and prices. The recent decline in the yen has the effect of pushing prices higher; therefore, we are closely watching the moves in guiding policy.”
Possibility of a rate hike in July
“Our decision on tapering of bond purchases and on the increase in interest rates are two different things” and “there is a possibility that we could raise interest rates at our next meetingdepending on the economic data, prices, financial data and information available at that time,” said Ueda, in a speech to Parliament.
Ueda stated that the BoJ is not yet fully convinced that inflation will sustainably reach its target of 2%, underlining the need to spend “a little more time” analyzing the data before raising rates again. But he said the behavior of companies in setting prices and wages had clearly changed against a backdrop of record profits and a tight labor market. “The economy will likely see clearer signs of a positive wage-inflation cycle” as nominal wages rise, she said.
Foreign investor interest remains at historic highs
At a general market level, the long-awaited and microscopic change in policy implemented by the Bank of Japan in March caused a decline in bank share prices, government bond yields and the yen, indicating that a decidedly more significant change was expected. Towards the end of the quarter, explains Richard Kaye, Portfolio Manager of the Comgest Growth Japan fund Comgest, the signs of an intervention have intensified in the face of the decline in the yen at its lowest since 1990. In Japan, data on wage negotiations were interpreted as a confirmation of inflation, while data on real wage increases collected by the Ministry of Health and Labor showed a much weaker increase than the figures forecast in last year’s framework. “We believe,” says Kaye, “that the inflation story in Japan is ambiguous at best and does not constitute a basis for a long-term thesis of growth in bank profits.”
In terms of prospects, the expert continues, the new interest from foreign investors for Japan it remains at historic highs. The data shows that domestic retail investors have not yet started investing in their market, as the new “NISA” tax-exempt accounts are predominantly used to purchase US stocks. This context could change radically in the event of normalization of the yen. “We expect a change in market leadership now that the banking rally, based on uncertain assumptions that has dominated in recent quarters, appears to be easing,” concludes Kaye.
