Bank of Japan policy update: A question of when, not if
Inflation has risen considerably in Japan, with CPI reaching a 41-year high of 4.3% in January. Improving wage dynamics indicate price rises may be more sustained compared to previous episodes.
Shunto – Japan’s spring wage negotiations – are pointing towards a 30-year record in terms of wage increases. Improving wages should prompt the Bank of Japan (BoJ) to start removing its accommodative monetary policy.
The Bank’s yield curve control (YCC) was put in place in September 2016 to prevent long-term yields from falling too low, reducing pressure on the financial system. But higher inflation is putting pressure on this policy.
We expect the BoJ – and its new Governor – to cautiously and gradually adjust policy. We expect it to reduce the targeted tenor of its YCC and delay any interest rate hikes to 2024.