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Japanese Inflation to Make Case for No BOJ Easing?

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The BOJ will meet on Monday, and issue its policy decision on Tuesday. But just before that, tomorrow Japan will release its latest inflation figures. Naturally, the CPI rate will be pivotal for expectations for what the central bank will do. But the consensus is that prices will continue to decelerate, and provide further uncertainty about the timing of Japan’s exit from ultra easing.

Another thing of note is that there is a relatively short period of time since the last BOJ meeting (four weeks). In that period, there were about two weeks in which the world was distracted by year-end holidays. That means many analysts are suggesting that not much has changed since the last time the BOJ essentially said it was too soon to start easing.

Time is Running Out

On the other hand, the consensus is that the BOJ would move towards easing after getting the conclusion of its report on changes in monetary policy in March. Considering that Governor Kazuo Ueda has repeated that he doesn’t want to surprise the market with a policy change, then there are very few meetings left in which the BOJ could provide forward guidance of a rate lift-off.

That’s on top of the existence of other policies that are thought to need to come to an end before rates can be lifted. Yield curve control (YCC) in particular. The consensus among economists is that the BOJ would do away with YCC before raising rates. Maintaining the policy would counter the effect of raising rates. It’s normal for central banks to stop buying bonds (quantitative easing) before moving to raise rates as well.

The Power of Signals

Current BOJ policy is still in full-on easing mode, and it would take a relatively fast pivot to put it on a rate hiking track by the end of the first quarter. That has given reason for yen bears to suspect that rate lift off might be further down the road than markets anticipate. It stands to reason that if the BOJ can keep its policy in place long enough, the global move towards easing will ease up the pressures for rate hikes as well.

Given how much expectation there is around a rate hike, anything the BOJ does in that direction could cause a strong move in the markets. The most likely measure that could be taken, according to economists, is ending YCC. That would likely be interpreted by markets that rate lift off is near. But for that very reason, the BOJ may be hesitant to take action at this juncture.

The Forecasts and the Data

76% of economists polled ahead of the BOJ’s rate decision expect no change in policy. Dissenters think that there is a chance the BOJ could try to split the difference, and once again raise the cap on YCC. That would allow a move towards tightening without providing a clear signal that rates will increase. The thing is, recently the markets have overpriced the potential of some kind of signal ahead of the BOJ meeting, only to be disappointed by strong easing rhetoric.

What could provide further arguments for no easing is the expectation that Japan’s inflation will fall to 2.6% from 2.8% prior. The so-called “core-core” rate, which excludes the effects of food and energy, is expected to be unchanged from 3.8% prior.

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