BOJ will only have little room to raise interest rates further – ANZ

While a lot of focus on the BOJ is turning to the outcome of the spring wage negotiations in the weeks ahead, ANZ is one to argue that the bigger picture outlook might be one that limits the scope for the central bank to stay on the tightening path. And the firm argues that it won’t be from a shake up of the BOJ board nor pressure from the government. Instead, it is the very nature of inflation dynamics in Japan.ANZ forecasts that inflation pressures in Japan will begin to soften this year and are looking for core prices to ease back down towards the 2% level. As such, that will challenge the BOJ mandate of having to be able to “sustain” core inflation at that threshold. The firm notes that:”There is much to consider in Japan’s economic outlook. However, in coming months we expect domestic economic conditions will be consistent with gradual disinflation through 2026. Headline Consumer Price Index inflation was 1.5% y/y in January, and we forecast it will average 1.7% this year. We expect core inflation (2.4% y/y) will come down gradually, closer to 2.0%. We are of the view that the BOJ needs to proceed cautiously with respect to further tightening.We forecast only one more 25 bps rate rise this year, as Japan gradually moves away from the zero lower bound, taking the policy rate to 1.00%.”That’s slightly on the conservative side as opposed to market pricing, with traders currently seeing ~46 bps of rate hikes from the BOJ by year-end.If there is really going to be just one more rate hike left by the BOJ, they might want to get a move on with the opportunity window likely to narrow further once we get past March and even more so after June.
This article was written by Justin Low at investinglive.com.

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