BoJ resists temptation, leaving policy unchanged

Chris Scicluna
Emily Nicol

BoJ resists temptation to follow its hawkish central bank peers, leaving policy unchanged
After the Fed’s hawkish pause on Wednesday and the ECB’s hawkish hike yesterday, the BoJ remained predictably unmoved today, leaving all policies unchanged when Kazuo Ueda’s second Policy Board meeting as Bank Governor concluded. With JGB market functioning much improved from earlier in the year, and the curve therefore no longer kinked, the Board was happy to leave in place +/-0.50% Yield Curve Control target range for the 10Y JGB. And it also therefore unsurprisingly maintained the commitments to keep buying JGBs, ETFs and certain other assets as necessary, as well as the -0.1% policy rate. 

The Board’s assessment of current economic conditions and the outlook remains little changed too. It continues to judge that economic activity is likely to “recover moderately toward around the middle of FY23” and continue to expand at an above-potential rate thereafter as the “virtuous cycle from income to spending gradually intensifies”. At the same time, it also still expects inflation to decelerate towards the middle of FY23 as cost-push pressures moderate, before accelerating again moderately in response to an increasingly positive output gap, higher inflation expectations and wage growth, and continued changes in wage- and price-setting behavior.

Of course, today’s policy meeting outcome was widely expected. Nevertheless, the continued reluctance of the BoJ to join its central bank peers in tightening policy saw JGB futures move higher, 10Y JGB yields drop about 2.5bps to 0.40% and the yen weaken back through ¥141.3/$. Of course, just as the other major central banks misjudged the strength of underlying inflation, Ueda acknowledged in his press conference the risk that the BoJ might ultimately do so too. At the same time, while underlying inflation data have indeed continued to surprise on the upside of late, he also insisted that an upwards revision in the BoJ’s inflation outlook next month to suggest that the inflation target is expected to be met over the medium term need not trigger an immediate policy shift, as the balance of risks around the baseline view matter too. Nevertheless, he wouldn’t rule out a change to policy, which could be justified by a substantive upwards revision to the BoJ’s policy outlook. And with Prime Minister Kishida yesterday suggesting that – contrary to earlier speculation – he does not intend to call a snap election for the summer, as for the Fed the BoJ’s July policy meeting looks to be a ‘live’ one, with a policy adjustment to YCC possible if not necessarily probable.

Detailed inflation data for May and labour cost and slack figures in focus in the euro area
After the ECB yesterday signalled that further tightening will be required as it revised up significantly its projections for core inflation this year and next, focus today will turn to final inflation figures for May. With final readings from the larger member states having aligned with their respective preliminary releases, the headline euro area HICP rate is expected to confirm the 0.9ppt drop to a fifteen-month low of 6.1%Y/Y, in part reflecting the steepest fall in energy inflation since the start of 2021 as well as a moderation in food inflation to an eight-month low. The flash estimate of core inflation also surprised on the downside, falling 0.3ppt to a four-month low of 5.3%Y/Y. Today’s numbers will provide a more granular breakdown, along with various measures of underlying price pressures watched by the ECB. With the ECB’s judgement on the inflation outlook also reflected a revised assessment of the labour market, focus today will also be on the latest labour force survey, which is likely to report that slack in the euro area remained close to a record low in the first quarter of the year. Meanwhile, having reached a record high at the end of 2022 (5.7%Y/Y), labour cost growth might well have moderated slightly in Q1, despite a pickup in negotiated wage growth.

BoE household inflation attitudes survey to be closely watched ahead of next week’s policy decision
Ahead of the BoE’s monetary policy decision next week, today’s release of its quarterly household inflation attitudes survey for the three months to May will be closely watched for developments in medium-term expectations, which in the three months to February eased to 3.0%Y/Y, the lowest for six quarters and below the long-run average (2.3%). But while expectations for two years ahead also eased to the lowest for five quarters, at 3.0%Y/Y it remained above the long-run average (2.7%).

US consumer survey expected to show that sentiment remains soft as price expectations remain relatively elevated
In the US, price expectations will also be in focus in today’s preliminary University of Michigan consumer survey. In May, the survey’s measure of inflation expectations 5-10 years ahead (3.1%) matched the highest reading since 2011, while expectations for the coming twelve months failed to fully reverse the spike in April to a five-month high. With household budgets continuing to be squeezed by high prices, consumer sentiment is likely to have remained at a subdued level in June (60), some way below the level at the start of the year (67) and well below the pre-pandemic benchmark (101).

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