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Data released today for Japan shows that inflation is not stickier or more persistent than expected, making a surprise BoJ rate hike in June unlikely.
In April, headline annual CPI in Japan rose 2.5 per cent, a deceleration from March’s 2.7 per cent rate.
Core inflation, which excludes food but not energy, slowed to 2.2 per cent from 2.6 per cent in March, in line with expectations.
Services inflation, an indicator of domestic inflationary pressures, decelerated to 1.7 per cent in April from 2.1 per cent in March.
The yen was broadly flat on the news, although it has weakened by 0.8 percentage points over the course of this week.
The data does not indicate that inflationary pressures are strong enough to justify an early hike. We therefore continue to expect the BoJ to hold the benchmark rate at the current level at the upcoming June meeting.
Beyond June, the BoJ will be watching indicators of economic activity and consumption, wage growth, and yen weakness.
Data released over the past few weeks has cast some doubt on the Japanese economy’s momentum, although the BoJ will have several additional data points on inflation and wage growth by July.
Last week, GDP data for the first quarter of 2024 showed that headline GDP fell 0.5 per cent on a quarterly basis, worse than expectations of a 0.3 per cent contraction.
Consumption undershot even more, dropping 0.7 per cent compared to the previous quarter.
Wider measures of wages have also been weak and have not yet shown any pass-through from the record shunto wage settlement, which occurred in March, to smaller companies’ wage bills.
However, the indicators we have so far suggest that private demand remains subdued, with wage growth too slow to encourage Japanese consumers to spend.
In recent days, the BoJ has been letting 10 year government bond yields rise to over 1 per cent, tightening financial conditions. We think it finds this preferable in the short term to raising policy rates.
We continue to expect the BoJ to deliver one additional rate hike in 2024, taking the benchmark rate to 0.1-0.2 per cent by the end of this year.
