BoJ slightly more upbeat but inevitably leaves policy unchanged

Chris Scicluna
Emily Nicol

BoJ slightly more upbeat but inevitably leaves policy unchanged
There were no surprises when the BoJ’s latest Policy Board meeting concluded earlier today. Inevitably, there were no changes made to the parameters of the Bank’s main monetary policy tools – the -0.1% policy rate, yield curve control framework and asset purchase guidelines. The Board also made clear that it is in no hurry to change things in this respect, restating its expectation that short- and long-term policy rates will remain at their present or lower levels, reaffirming that it will not hesitate to take additional easing measures if necessary, and re-emphasising its commitment to achieving the 2% inflation target on a sustained basis. In light of recent media reports suggesting otherwise, in his press conference, Kuroda was happy to underscore that this is certainly not the time to consider normalisation of Japanese monetary policy. And he acknowledged that monetary policy at most of the other major central banks now therefore looks set to diverge from that of the BoJ. The only action on policy today was a routine one-year extension of its special Loan Support Program measure aimed at stimulating bank lending, which otherwise would have seen no further loans disbursed after June this year.

One focus today was the BoJ’s updated economic forecasts in its latest Outlook Report. While slightly more upbeat than of late, these were also pretty much in line with expectations, with inflation still expected to be little better than half the 2% target at the end of the projection horizon and thus Kuroda set to fail to meet his main objective by the time he steps down as BoJ Governor next year. Nevertheless, thanks to the global trends that are prompting a rethink about monetary policy at many of the major central banks, the BoJ was at least able to judge that the risks to the inflation are no longer skewed to the downside, a relatively modest milestone that was passed for the first time since 2014.

In particular, due to higher energy prices and some pass-through of increased raw material costs, as well as the fading impact of the sharp reductions in mobile phone charges that pushed inflation into negative territory over recent months, the median forecast of Policy Board members suggests that core inflation (excluding fresh food) will rise from zero on average in FY21 to 1.1%Y/Y in the coming fiscal year (up 0.2ppt from the median forecast three months ago). And with output expected to move above potential in FY22 and move further above potential thereafter, the median projection if for inflation to remain at 1.1%Y/Y or thereabouts in FY23 (nevertheless up just 0.1ppt from three months ago).

In terms of economic growth, while the median forecast for FY21 was revised down by 0.6ppt to 2.8%Y/Y to reflect the damaging recent impact of supply bottlenecks on production, the projection for FY22 was revised higher by 0.9ppt to 3.8%Y/Y thanks not least to the government’s fiscal stimulus, as well as increased external demand amid the expected easing of supply-chain disruption. The median projection for FY23 was, however, nudged down 0.2ppt to 1.1%Y/Y. Unlike inflation, however, the Bank still considers the risks to the outlook for growth to be skewed to the downside. Uncertainties relate to the outlook for the coronavirus, developments abroad, commodity prices and the exchange rate (which Kuroda made clear that he does not consider to be too weak), as well as firms’ and households’ expectations and firms’ price-setting behaviour.

UK labour market remains tight despite the rise in coronavirus cases, but real wage growth turns negative for first time since July 2020
This morning’s data from the UK suggested again that the labour market is tight, with minimal visible evidence so far of an adverse impact from the emergence of the Omicron variant and more stringent restrictions across the UK last month. Certainly, according to the timeliest figures, the number of payrolled employees continued to rise in December, up a further 184k on the month to be 409k (1.4%) above the pre-pandemic level and 1.3mn above its level a year ago. Nevertheless, in the three months to November, the labour force survey suggests that employment rose a more modest 59k (the smallest such rise since May), and that was only thanks to an increase in part-time workers (109k). So given the continuing decline in self-employed workers, overall employment still remained 598k below the pre-pandemic level, while the total number of hours worked also slipping back slightly in November, to be still 33.2mn below the pre-pandemic level. Overall, the level of unemployment fell 41k in the three months to November to leave the unemployment rate down 0.4ppt on the quarter to 4.1%, just 0.1ppt higher than the pre-pandemic level.

Meanwhile, job vacancies rose to a new record in the three months to December, of 1.25mn, to be 460k above the pre-pandemic level with record vacancy numbers across most industries too. But the single-month estimate fell for the second successive month suggesting that we might well have now passed the peak. Wage growth also continued to moderate reflecting the fading of compositional and base effects, with average total pay (including bonuses) down 0.7ppt to 4.2%3M/Y and regular pay (excluding bonuses) down 0.5ppt to 3.8%3M/Y. Admittedly, wage growth on a three-month basis – which better reflects the current trend in light of base effects – edged slightly higher in the three months to November (by 0.5ppt to 4.2%3M/3M annualized). Nevertheless, given rising inflation, real wage growth was inevitably much weaker. And while single-month estimates are volatile, real average earnings for November fell (-0.9%Y/Y) for the first time since July 2020, which if continues will inevitably weigh on household consumption growth.

French retail survey points to growth in December, but drop in Q4; German ZEW expected to point to slightly improved assessment at start of 2022
A relatively quiet day for euro area releases brought further insight into household spending at the end of last year. In France, the central bank’s latest retail survey suggested that spending on goods rose a solid 2.2%M/M in December, driven by a more than 10½%M/M increase in expenditure on autos and near-7%M/M rise in perfume products ahead of the festive period. But coming on the back of two consecutive monthly declines in excess of 1%M/M, sales were down over the fourth quarter as a whole, by 0.9%Q/Q, following strong growth of 4.5%Q/Q in Q3. This notwithstanding, the Bank of France’s business surveys last week still implied overall GDP growth of 0.6%Q/Q in Q4.

Consistent with national figures released earlier this month, today’s ACEA new car registrations data suggested that sales on the whole remained relatively subdued in December. Indeed, despite rising on the month to the highest level since June (on an unadjusted basis), the number of units registered that month (673k) was the lowest December reading since 2013 and still down 22.6%Y/Y. So, over the year as a whole, sales were down 2.4%Y/Y despite the record low base of 2020. Among the country detail, the weakness in full-year figures was most striking in Germany (-10.1%Y/Y), which has seen production disrupted significantly by the global semiconductor shortage.

Later this morning will bring the German ZEW investor survey is expected to align with the Sentix investor confidence survey results and suggest a slightly more upbeat assessment at the start of the New Year, reflecting the view that the economic impact of the Omicron variant will be less severe than previously feared.

US housing market and manufacturing surveys due today
Another relatively quiet day for US economic releases brings the NAHB housing market index and Empire Manufacturing survey, both for January, with the latter expected to slip back slightly in light of anticipated disruption from the spread of Omicron, albeit remaining broadly in the middle of the range of the past six months. 

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