Japan Watch: Markets are unprepared for BoJ action
Conclusions up front:
– Expect the Bank of Japan to…
– Markets price in…
– If the BoJ moves the needle…
Let’s have a look at the details.
It is a no-brainer for the BoJ to increase the inflation forecast given how firm inflation has been relative to forecasts, but the big question is whether it matters for the policy decision? The short answer is yes.
When the BoJ moves the needle a lot (as in July), they also move the needle on policy. Expect another move in the YCC-cap of 25 bps with even greater flexibility introduced and expect a weaker JPY again.
The inflation forecast from July predicts 2.5% CPI ex-fresh food inflation for the fiscal year 2023. The September print was the first print (since April) below 3%, why a forecast of at least 3% seems likely unless the BoJ expects material disinflation from here and until April 2024.
Chart 1: Inflation forecast from July 2023