BoJ defies market pressures

Chris Scicluna
Emily Nicol

BoJ keeps YCC target range unchanged, only tweaks its fund-supplying operations
Despite a dysfunctional JGB market amid ongoing speculative pressures against the 10Y yield target ceiling despite record BoJ purchases, Kuroda did not budge today. Indeed, the Policy Board voted unanimously to maintain the YYC target range for the 10Y yield at +/-0.50%. The BoJ did, however, make various tweaks to its special funds-supplying facilities, including a decision to extend from two years to up to ten years the duration of such operations on a case by case basis. And having previously set the lending rate on those operations at 0.0%, the Board also opened the door to applying a negative interest rate if required. Those amendments might be considered measures to facilitate increased purchases of JGBs by Japanese banks. And having conducted another day of record lending of its JGB holdings back to the market today (¥8.4trn), the BoJ also announced a five-year loan operation (to be held on 23 January) for the first time, with the rate to be determined by auction.

In his press conference, Kuroda again suggested that more time was required to assess the impact of the December adjustments before changing policy again. And we think it highly unlikely that he will unveil any big policy amendments in his final policy-setting meeting as Governor on 10 March. Nevertheless, speculative pressures against the YCC target ceiling will not go away – indeed, markets will increasingly expect the ceiling to be lifted or extinguished completely by Kuroda’s successor, so will continue to position against it. Even though it already owns more than 100% of the benchmark 10Y bond, BoJ JGB purchases will remain substantial and market functioning will remain dysfunctional – the opposite of Kuroda’s supposed intention when he widened the 10Y yield target range last month.

So, Kuroda looks set to give his successor as BoJ Governor a hospital pass when he starts his tenure in April. Of course, the identity of Kuroda’s successor remains uncertain. But Mari Iwashita, our BoJ watcher at Daiwa Securities, currently attaches a 50% probability to the appointment of former BoJ Deputy Governor Hirohide Yamaguchi, Chair of the Board of Governors of the GPIF and a critic of Kuroda’s policy. However, current BoJ Deputy Governor Masayoshi Amamiya and former BoJ Deputy Governor and Chair of Daiwa Institute of Research Hiroshi Nakaso are also still in the running.

BoJ expects core inflation to fall back below target as it revises its growth forecasts lower
In terms of the BoJ’s updated economic forecasts, the Policy Board’s median forecast for core CPI (excluding fresh foods) was revised marginally higher in FY22, by 0.1ppt to 3.0%Y/Y with a more sizeable revision made to its preferred core measure (excluding fresh foods and energy), by 0.3ppt to 2.1%Y/Y. But the core rates are expected to subsequently ease to between 1.6%-1.8%Y/Y in FY23 and FY24, allowing Kuroda to insist that the BoJ’s ultra-accommodative policy stance will remain in place. Of course, risks to the outlook remain substantive, related not least to developments overseas. And in terms of its GDP growth outlook, the BoJ revised down its forecasts across the horizon, to 1.9% in FY22, 1.7% in FY23 and 1.1% in FY24.

Japanese machine orders fall sharply in November
Today’s Japanese machinery orders data fell well short of expectations, with core orders down 8.3%M/M in November (having been forecast to drop just 1.0%M/M), driven by a third consecutive decline in orders placed by manufacturers (-9.3%M/M), with particularly steep declines in electrical machinery and non-ferrous metals. Orders placed by non-manufacturers also fell 3.0%M/M, albeit this followed strong growth in recent months. Overall, core orders were trending in the first two months of Q4 more than 4% below the Q3 average, when growth fell more than 1½%Q/Q, suggesting that, amid ongoing economic uncertainties, the outlook for near-term private sector capex remains extremely weak.

UK inflation fell for second successive month but core rate remains sticky
Broadly in line with expectations, UK consumer price inflation moderated a touch for the second successive month in December. In particular, the headline CPI inflation fell 0.2ppt to 10.5%Y/Y, to be 0.6ppt below October’s multi-decade peak. The main driver of the decline was again motor fuel, inflation of which dropped almost 6ppts to 11.5%Y/Y, more than 30ppts below the summer peak. Inflation of non-energy industrial goods moderated further too, down about ½ppt to 5.8%Y/Y, the lowest since January and 2.2ppts below April’s peak, seemingly reflecting an easing of global price pressures in the sector. That was driven in particular by lower inflation of clothing and footwear (down to a six-month low of 6.5%Y/Y), as well as recreational goods such as toys and games (down to an eleven-month low of 4.3%Y/Y) and furniture and household equipment (down to a ten-month low of 9.8%Y/Y). However, there were some offsetting increases, including restaurants and hotels (up more than 1ppt to 11.3%Y/Y), which pushed up services inflation by ½ppt to 6.9%Y/Y, the highest on the series dating back to 1997. So, core inflation remained sticky, unchanged at 6.3%Y/Y, contrary to expectations of a decline. And inflation of food and drink rose again too, up 0.4ppt to 16.8%Y/Y, also a series high.

Pressures in services component underlines case for another 50bps hike in Bank Rate next month
The further drop in headline inflation in December is welcome, and left the quarterly average in Q4 0.2ppt below the BoE’s forecast in its November Monetary Policy Report. And thanks to base effects related not least to energy prices, inflation will continue to decline over coming months and quarters. But the MPC will remain concerned about the stickiness of the core measure. Indeed, just as they did in every month of last year, the increases in prices of core goods and services both exceeded the respective long-run average increments in December. And while in part it reflects continued pass-through of increases in energy and food prices, the acceleration in services inflation also tallies with continued labour market tightness and associated wage pressures, which the BoE will fear risk inflation persistence even as the initial terms of trade shock fades. Indeed, coupled with yesterday’s stronger-than-expected wage data, today’s inflation figures underscore the likelihood of another 50bp hike in Bank Rate to 4.00% on 2 February.

Final euro area inflation figures expected to confirm a drop in the headline rate in December, but an uptick in the core rate
In the euro area, today will bring final inflation figures for December. According to the flash release, euro area consumer price inflation slowed 0.9ppt in December to a four-month low of 9.2%Y/Y. The detail confirmed that the drop in inflation was driven by lower energy inflation, thanks to government interventions including the German government’s special payments towards household bills – indeed, Destatis yesterday showed that German gas prices fell a whopping 39.1%M/M in December, to leave the annual rate down 86ppts at 26.1%Y/Y. But core inflation ticked higher last month, to a new record 5.2%Y/Y, as core goods and services inflation rose. In addition, euro area construction output figures for November are due. Consistent with the latest PMIs and following declines in activity in Germany (-2.2%M/M) and France (-1.2%M/M), aggregate euro area construction output is likely to have contracted in November. Separately, this morning’s new car registrations figures reported a further sizeable improvement at the end of last year, with sales up 14.5%Y/Y in December, driven by an acceleration in Germany (38.0%YY) and Italy (21%YY). Admittedly, this still left them some 14% below the December 2019 level ahead of the pandemic.

US PPI, retail sales and industrial production data in focus on Wednesday
A busier day for US releases today, including December retail sales, industrial production and PPI inflation data. Following last week’s CPI release, today’s PPI report is expected to show that producer energy prices fell for the second successive month, while easing supply-chain backlogs and moderating demand likely further contained pressure on prices of core items. Overall, our colleagues at Daiwa America forecast a drop in headline producer prices of 0.2%M/M, and a rise of just 0.2%M/M in core prices. Meanwhile, the value of retail sales is expected to have been weak, impacted by a decline in new vehicle sales, lower petroleum prices, cautious spending on non-essential items and disruption from severe winter storms in the second half of the month. Overall, our colleagues at Daiwa America forecast a drop in total sales of 0.6%M/M, a touch better than the Bloomberg survey consensus (-0.9%M/M). Finally, the IP report is expected to have remained weak, with a drop in manufacturing output last month likely to be partly offset by higher utilities usage amid the cold temperatures.

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